As filed with the Securities and Exchange Commission on August 27, 2003 Registration No. 333-106160
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
m-Wise, Inc.
(Name of small business issuer as specified in its charter)
Delaware 4812 11-3536906
(State or Jurisdiction of Primary SIC Code (IRS Employer
incorporation or organization) Identification No.)
The Company Corporation
10 Hasadnaot Street 2711 Centerville Road, Suite 400
Herzeliya Pituach, Israel 46728 Wilmington, Delaware 19808
Telephone +972-9- 9581711 Telephone (800) 420-9771
(Address, including zip code, and telephone number, including area code (Name, address, including zip code, and telephone
of Registrant's principal executive offices) number, including area code, of agent for service)
copy to:
Jay M. Kaplowitz, Esq.
Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP
101 East 52nd Street, 9th floor
New York, New York 10022
Tel. (212) 752-9700; Fax (212) 980-5192
Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after the effective date of this registration
statement.
If the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to Offering Price Aggregate Amount of
Securities to be Registered Be Registered Per Share(1) Offering Price Registration Fee
- --------------------------------------- ------------- ---------------- ---------------- ----------------
common stock offered by
selling stockholders................... 8,595,632 $1.00 $ 8,595,632 $ 695.39
Total.................................. 8,595,632 $ 8,595,632 $ 695.39 (2)
- ----------
(1) Estimated solely for purposes of calculating the registration
fee. The proposed maximum offering price per share is based
upon the expected public offering price of $1.00 per share
pursuant to Rule 457(a). The common stock is not traded on any
market and the Registrant makes no representation hereby as to
the price at which its common stock shall trade. Fee rate is
$80.90 per $1 million pursuant to Release 33-8095.
(2) Filing fee paid with initial filing.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
2
Subject to Completion, Dated August 27, 2003
PRELIMINARY PROSPECTUS
m-Wise, Inc.
8,595,632 Shares of common stock
The 8,595,632 shares of our common stock are being offered by the
selling stockholders. The expenses of the offering, estimated at $9,000, will be
paid by us. We will not receive any proceeds from the sale of shares by the
selling stockholders. There is currently no trading market for our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or passed on the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
Please see "Risk Factors" beginning on page 5 to read about factors you
should consider before buying shares of our common stock.
Initial Offering Price Sales Commissions Total to selling stockholders
- -------------------------------------------------------------------------------------------------
Per share $1.00 (1) $1.00
Total $8,595,632 (1) $8,595,632
- -------------------------------------------------------------------------------------------------
- ----------
(1) We will not receive any proceeds from this offering. No person
has agreed to underwrite or take down any of the securities.
For sales on any trading market, sales commissions will be
limited to those paid in similar market transactions. For
private sale transactions, no sales commission can be paid.
There is no minimum amount of securities which may be sold.
The Initial Offering Price is $1.00 per share. Following
commencement of any public trading market the sales price of
the common stock will likely fluctuate in accordance with
market price.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
The date of this prospectus is ____, 2003.
1
[GRAPHIC OMITTED]
Illustration: schematic architecture of m-Wise core technology o the MOMA
platform
2
PROSPECTUS SUMMARY
The following summary highlights some of the information in this
prospectus. It may not contain all of the information that is important to you.
To understand this offering fully, you should read the entire prospectus
carefully, including the risk factors and our financial statements and the notes
accompanying the financial statements appearing elsewhere in this prospectus.
The company
We develop, manufacture and support an application gateway marketed
under the brand MOMA Gateway. MOMA provides middleware technology that mediates
and integrates between various key enterprise applications such as billing,
reporting, provisioning, third-party management, development, content, customer
relationship management and application platforms for cellular operators and
other wireless application service providers. Our clients include prominent
global wireless application service providers and wireless operators. Our
channel partners include Hewlett-Packard in Asia, Siemens globally, Comverse
globally and Ericsson EMEA (Europe, Middle East and Africa).
Our technology allows our clients to enable consumers to utilize and
purchase data and multimedia value added services, such as applications for
handset personalization (ringing tones and images, for example), news,
entertainment and chat via cell phones and other wireless devices. We primarily
operate through original equipment manufacturers and regional sales
representatives to sell our products. Our revenues are primarily derived from
license fees and we spend a significant portion of our revenues on continuing
research and development. Our cumulative losses as of June 30, 2003 were
$8,511,279. The segment of the technology industry in which we operate has been
characterized by volatility and financial instability.
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data and other data are qualified
by reference to, and should be read in conjunction with, our financial
statements and their related notes appearing elsewhere in this prospectus and
"Management's Discussion and Analysis." The selected statement of operations
data shown below for the fiscal years ended December 31, 2002 and 2001 and the
balance sheet data as of December 31, 2002 are derived from our audited
financial statements and the selected statement of operations data shown below
for the six months ended June 30, 2003 and 2002 and the balance sheet data as of
June 30, 2003 are derived from our unaudited interim financial statements
included elsewhere in this prospectus.
Statement of Operations Data
YEAR ENDED SIX MONTHS ENDED
December 31, June 30,
----------------------- -----------------------
2001 2002 2002 2003
---------- ---------- ---------- ----------
Revenues $ 585,894 $1,619,112 $ 452,990 $ 275,877
General and
Administrative Expenses $2,720,030 $1,924,661 $1,043,939 $ 941,593
Research and Development Expenses $1,908,777 $1,923,806 $ 786,034 $ 348,336
Net Loss $4,042,913 $2,255,988 $1,381,468 $1,039,592
Balance Sheet Data
As of
--------------------------
December 31, June 30,
----------- -----------
2002 2003
Current Assets $ 534,706 $ 369,403
Total Liabilities $ 3,391,853 $ 3,620,477
Stockholders' Equity (Deficiency) $(2,340,155) $(2,854,940)
3
The Offering
The offering is being made by the selling stockholders.
Securities Offered:..................... 8,595,632 shares of common stock.
Initial Offering Price.................. $1.00 per share.
Offering Period:........................ Until 12 months from the date of this prospectus.
Risk Factors................................ The securities offered hereby involve a high degree of
risk and immediate substantial dilution and should not be
purchased by investors who cannot afford the loss of
their entire investment. See "Risk Factors".
Common stock Outstanding(1) Before Offering: 23,419,254(1) shares
Common stock Outstanding After Offering:.... 23,419,254(1) shares
- ----------
(1) Based on 5,174,554 shares of common stock issued and
outstanding as of June 30, 2003, as well as 9,707,745 shares
of common stock currently issuable upon conversion of 268,382
Series A, 489,456 Series B and 6,315,258 Series C preferred
stock, as of June 30, 2003, as well as a warrant exercisable
for 56,180 shares of Series A preferred stock and 8,480,775
shares of common stock currently issuable upon exercise and
conversion of outstanding warrants and options for nominal
consideration (par value $.01), as well as common stock and
Series B preferred stock reserved for grant under employee
stock option plans, on an as-converted basis. All above
mentioned calculations were made on a fully diluted and
as-converted basis, whereby the conversion and exercise of
every preferred share and all warrants, options and shares of
preferred or common stock reserved for grant under our
employee stock option plans were calculated as if all such
shares, warrants and options were converted and exercised.
Our corporate offices are located at 10 Hasadnaot Street, Herzeliya
Pituach, Israel 46728, and our telephone number is +972-9-9581711. Information
contained on our web pages at "www.m-wise.com" does not constitute part of this
prospectus.
4
RISK FACTORS
An investment in our common stock involves a high degree of risk. In addition to
other information contained in this prospectus, you should carefully consider
the following risk factors and other information in this prospectus before
investing in our common stock.
We have had operating losses and limited revenues to date and do not expect to
be profitable in the foreseeable future.
We have incurred net losses for each of the years ended December 31,
2002 and 2001 in the amounts of $2,255,988 and $4,042,913, respectively, and for
the six months ended June 30, 2003 and 2002 in the amounts of $1,039,592 and
$1,381,468, respectively. We expect to continue to incur losses for at least the
foreseeable future. Through June 30, 2003, we had an accumulated deficit of
approximately $8,511,279. We also have had limited revenues. Revenues for the
years ended December 31, 2002 and 2001 were $1,619,112 and $585,894,
respectively, and for the six months ended June 30, 2003 and 2002 were $275,877
and $452,990, respectively. There can be no assurance that we will achieve or
sustain profitability in the foreseeable future.
Without additional equity or debt financing we cannot carry out our business
plan.
Our current business plan involves substantial costs, primarily those
costs associated with the restructuring of our subsidiaries and supporting the
sales efforts of our channel partners. While cash generated by our operations
will cover most of such costs, any current anticipated revenues will be
insufficient to cover all of such costs. If we are unable to secure additional
equity or debt financing our results of operations will be adversely affected.
Our quarterly revenues could fluctuate and lead to performance delays.
Our results of operations have fluctuated in the past and, we believe,
are likely to continue to fluctuate from period to period depending on a number
of factors, including but not limited to the timing and receipt of significant
orders, the timing of milestone payments within the license schedules, the
timing of completion of contracts, increased competition, or changes in the
demand for our products and services. Timing of sales could cause a lack of cash
and delay our completion of contracts, and we could face cancellation of
contracts for that reason, which could have a materially adverse impact on our
operations.
Anti dilution rights of preferred stock limits our ability to raise capital
without significant dilution.
Our Series A, Series B and Series C preferred stock converts into
common stock upon a firm commitment underwritten public offering of our common
stock which reflects a pre-offering valuation of m-Wise of at least $50 million,
upon the date specified by written consent or agreement of holders of at least a
majority of the shares of Series B preferred stock then outstanding, or
voluntarily upon the election of each holder of such stock, none of which have
occurred to date. The conversion rates of the Series B and Series C preferred
stock are subject to anti-dilution protection in the event we sell shares of our
common stock at less than $1.28 per share (reflecting anti-dilution adjustments
to the Series B preferred stock conversion price due to the issuance of Series C
preferred stock) and $.048 per share, respectively. We have granted options to
purchase Series B preferred stock under existing stock option plans and
warrants, and may grant such additional options or warrants in the future, and
the Series B preferred stock underlying such options will also bear
anti-dilution rights. Consequently, any offering by us of our common stock at
less than these prices will cause a corresponding increase in the number of
common shares issuable upon conversion of the Series B and Series C preferred
stock, which may dilute the value of your investment.
5
Our stockholders have pre-emptive rights to purchase securities of m-Wise, which
could impair our ability to raise capital.
Except for certain exempt issuances set forth in our Certificate of
Incorporation, our stockholders have certain pre-emptive rights to purchase
their pro-rata portion of any of our securities which we may, from time to time,
propose to sell and issue. Unless these rights are waived by all stockholders,
the delay occasioned by the procedures inherent in the pre-emptive right could
make it difficult or impossible for us to secure outside equity financing.
We operate internationally and are subject to currency fluctuations, which could
cause us to incur losses even if our operations are profitable.
We currently operate directly and through original equipment
manufacturers and regional sales representatives in the European Union, United
Kingdom, Singapore and Taiwan. Our research and development operations are
conducted in Israel and we expect to operate in additional markets, each with
its own currency. Contracts can be denominated in one of several currencies. A
change in currency rates could cause us losses as we perform under the contract
or as we are paid. We do not engage in currency trading operations to minimize
this risk, but we might if warranted in the future. Also, our revenues earned
abroad may be subject to taxation by more than one jurisdiction, and this could
have the effect of reducing our earnings.
We are dependent upon certain major customers, and the loss of one or more of
such customers could adversely affect our revenues and profitability.
During the year ended December 31, 2002, approximately 73% of our sales
were from sales to three customers, and 36% of sales were to one customer. The
agreement with a customer typically includes a down payment over a period in
which our system is installed, and subsequent payments which are a function of
actual use by the end-users of the system. At the current stages of our
business, the loss of any one of our major customers would seriously affect our
revenues and profit.
Anti-takeover provisions in our certificate of incorporation discourage hostile
takeovers and can reduce the likelihood of stockholder's receiving a premium
from a takeover.
Our Certificate of Incorporation gives the holders of preferred stock
the right to elect four of the five authorized directors, and two holders of our
common stock, Putchkon.com LLC and Proton Marketing Associates LLC, also hold a
majority of our issued and outstanding Series B preferred stock and were
additionally granted options to purchase Series B preferred stock. Holders of
Series C preferred stock are entitled to elect two members of the Board but have
not done so to date. As such, our officers, directors, founders and certain
other stockholders currently control the outcome of all matters submitted to a
vote by the holders of our common stock, including the election of our
directors, amendments to our Certificate of Incorporation and approval of
significant corporate transactions. Additionally, our officers and directors
could delay, deter or prevent a change in our control that might be beneficial
to our other stockholders. In addition, our Certificate of Incorporation also
provides that upon occurrence of certain events such as mergers or acquisitions,
the holders of preferred stock are entitled to receive our assets in preference
to common stockholders, and also gives preferred stockholders many other
preferences. One of the effects of all these provisions is to deter a takeover
of us, even though there may come a time in the future when a takeover would
enable common stockholders to realize more value for their shares.
Our auditors have rendered a going concern emphasis opinion on our
financial statements.
Our auditors have expressed concern as to our ability to continue as a
going concern. If our business is ultimately unsuccessful, the assets on our
balance sheet could be worth significantly less than their carrying value and
the amount available for distribution to stockholders on liquidation would
likely be insignificant.
6
Penny stock rules could make it hard to resell your shares.
Our common stock does not meet the listing requirements for any trading
market other than the OTC Bulletin Board. The OTC Bulletin Board may not approve
our listing. Consequently, the liquidity of our securities could be impaired,
not only in the number of securities which could be bought and sold, but also
through delays in the timing of transactions, reduction in securities analysts'
and the news media's coverage of us, and lower prices for our securities than
might otherwise be attained.
In addition, the "penny stock" rules limit trading of securities not
traded on NASDAQ or a recognized stock exchange, or securities which do not
trade at a price of $5.00 or higher, in that brokers making trades in those
securities must make a special suitability determination for purchasers of the
security, and obtain the purchaser's consent prior to sale. The application of
these rules may make it difficult for purchasers in this offering to resell
their shares.
U.S. investors may have trouble in attempting to enforce liabilities based upon
U.S. Federal securities laws against us and our subsidiaries and our non-U.S.
resident directors.
Our research and development operations are conducted through our
subsidiary, m-Wise Ltd., which is incorporated and located in Israel and our
marketing and sales operations are conducted through original equipment
manufacturers and regional sales representatives. All of our tangible assets are
located outside the United States. In addition, all of our directors are foreign
citizens. As a result, it may be difficult or impossible for United States
investors to serve process within the United States upon management or to
enforce a judgment upon management for civil liabilities in United States
courts.
Risks Related to our Location in Israel
Our research and development facilities are located in Israel and we have
important facilities and resources located in Israel which could be negatively
affected due to military or political tensions.
Our Israeli subsidiary, m-Wise Ltd., is incorporated under the laws of
the State of Israel and our research and development facilities as well as
significant executive officers are located in Israel. Although a substantial
portion of our sales are currently being made to customers outside of Israel,
political, economic and military conditions in Israel could nevertheless
directly affect our operations. Since the establishment of the State of Israel
in 1948, a number of armed conflicts have taken place between Israel and its
Arab neighbors and a state of hostility, varying in degree and intensity, has
led to security and economic problems for Israel. We could be adversely affected
by any major hostilities involving Israel, the interruption or curtailment of
trade between Israel and its trading partners, a significant increase in
inflation, or a significant downturn in the economic or financial condition of
Israel. Despite the progress towards peace between Israel and its Arab
neighbors, the future of these peace efforts is uncertain. Several Arab
countries still restrict business with Israeli companies which may limit our
ability to make sales in those countries. We could be adversely affected by
restrictive laws or policies directed towards Israel or Israeli businesses.
Certain of our officers and employees are required to serve in the Israel
Defense Forces and this could force them to be absent from our business for
extended periods.
Several of our male employees located in Israel are currently obligated
to perform up to thirty-six days of annual reserve duty in the Israel Defense
Forces and are subject to being called for active military duty at any time. The
loss or extended absence of any of our officers and key personnel due to these
requirements could harm our business.
7
The rate of inflation in Israel may negatively impact our costs if it exceeds
the rate of devaluation of the NIS against the dollar.
Substantially all of our revenues are denominated in dollars or are
dollar-linked, but we incur a portion of our expenses, principally salaries and
related personnel expenses in Israel, in New Israeli Shekels (NIS). In 2002,
48%, and in the six months ended June 30, 2003, 34% of our costs were incurred
in NIS. As a result, we are exposed to the risk that the rate of inflation in
Israel will exceed the rate of devaluation of the NIS in relation to the US
Dollar or that the timing of this devaluation will lag behind inflation in
Israel. In that event, the dollar cost of our operations in Israel will increase
and our dollar-measured results of operations will be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information in this prospectus may contain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. This information may involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements to
be materially different from future results, performance or achievements
expressed or implied by any forward-looking statements. These factors include
the risks described in "Risk Factors." Forward-looking statements, which involve
assumptions and describe our future plans strategies and expectations, are
generally identifiable by use of the words "may," "should," "expect,"
"anticipate," "estimates," "believe," "intend" or "project" or the negative of
these words or other variations on these words or comparable terminology.
8
USE OF PROCEEDS
We will not receive any proceeds from the sale of the securities being
registered herein.
DIVIDEND POLICY
We have not paid any dividends on our common stock. We are prohibited
from paying dividends under certain promissory notes in the aggregate amount of
$1.8 million held by Syntek Capital AG and DEP Technology Holdings Ltd. We
currently intend to retain any earnings for use in our business, and therefore
do not anticipate paying cash dividends in the foreseeable future.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is currently no market for our securities, including our common
stock being offered herein, and there has never been a market for our common
stock. As of June 30, 2003, there were 11 record holders of stock of our
securities, including eight record holders of common stock; one record holder of
Series A preferred stock; three record holders of Series B preferred stock; and
one record holder of Series C preferred stock.
There are currently outstanding warrants for the purchase of 56,180
shares of Series A preferred stock (currently 56,180 shares of common stock, on
an as converted basis) and 180,441 shares of Series B preferred stock (currently
1,170,963 shares of common stock on an as converted basis); 1,074,636 shares of
Series B preferred stock (currently 6,859,200 shares of common stock on an as
converted basis) and 450,612 common stock reserved under employee stock option
plans pursuant to which additional shares may be issued; and an Investors'
Rights Agreement with the holders of Series B and Series C preferred stock. As
of June 30, 2003, 23,419,254 shares of common stock or shares currently
convertible into common stock are issued and outstanding, on a fully diluted, as
converted basis, including the 8,595,632 shares of common stock which have been
registered for resale in this prospectus. There are 19,139,133 shares of common
stock or common stock equivalents which can be resold in the public market in
reliance upon the safe harbor provisions of Rule 144.
m-Wise and the holders of the Series B Preferred Stock and Series C
Preferred Stock are parties to an Investors' Rights Agreement dated January 11,
2001. Under this agreement, we agreed to provide such holders with demand
registration rights, applicable six months after the effective date of this
registration statement (12 months in the case of a registration statement on
Form S-3); to file our reports in accordance with Section 13 of the Securities
Exchange Act of 1934 and otherwise ensure that its financial information is
"publicly available" for purposes of such investor's resales under Rule 144;
provide the investors with copies of our financial statements on a periodic
basis; provide access to our books and records; obtain key man life insurance in
the amount of $1,000,000 on each of Messrs. Broudo and Ben-Asulin (which has not
been complied with ); and provide the investors with a right of first refusal to
purchase newly issued m-Wise securities. The holders were also granted certain
registration rights which are inapplicable to this registration statement.
Certain rights under the Investors' Rights Agreement terminate immediately prior
to a firm commitment underwriting under the Securities Act, effected on the US,
London, Paris or Frankfurt Stock Exchanges, provided such firm commitment
underwriting is for no less than $20,000,000 net of underwriting discounts and
commissions and such underwriting reflects m-Wise a pre-money valuation of no
less than $60 million.
9
Equity Compensation Plan Information
- ---------------------------- -------------------------- -------------------------- --------------------------
Plan category Number of Securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights warrants and rights equity compensation
plans (excluding
securities reflected in
column (a))
- ---------------------------- -------------------------- -------------------------- --------------------------
Equity compensation plans -0- -0- -0-
approved by security
holders
- ---------------------------- -------------------------- -------------------------- --------------------------
Equity compensation plans 1,523,637 $0.01 1,611
not approved by security
holders
- ---------------------------- -------------------------- -------------------------- --------------------------
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
We were incorporated in February 2000 and commenced operations
immediately thereafter. We initially primarily provided pan-European wireless
application service provider operations by hosted MOMA Gateway services to
customers in the United Kingdom, Spain, France and Italy. We established data
centers in Spain, Italy and France that were connected to our main data center
in the United Kingdom. We had connectivity and billing arrangements with
cellular operators that enabled us to provide our hosted services. Altogether we
were enabling delivery and billing of data value added services to over 100
million wireless users by our clients, such as content and media providers,
advertising agencies and entertainment companies.
We gained strong credibility and experience as a wireless application
service provider during calendar 2000 and 2001, while we continued to build and
develop our wireless middleware product. The wireless application service
providers' operations provided us the ability to commercially test our product
across multiple geographic and vertical markets, to test our Gateway's
management of multiple applications and services across various operators and
partners, and to test our time-to-market and cost efficiencies in developing
value added services using different protocols for the transmission of data and
methods of user service interactions (e.g. SMS, IVR and J2ME). SMS, which stands
for Short Messaging Service, is built into all GSM cellular phones and enables
subscribers to send and receive text messages of up to 160 characters. IVR,
which stands for Interactive Voice Response, is utilized for billing certain
value added services using premium-rate fixed-line phone systems. J2ME, which
utilizes Java programming technology built into certain cellular phones, enables
applications to be written once for a wide range of devices, to be downloaded
dynamically, and to leverage each device's native capabilities. However, we
lacked sufficient financial and management resources to dominate the
pan-European wireless application service providers market and achieve
profitability. During the year ended December 31, 2001 we had revenues of
$585,894 and a net loss of $4,042,913. By December 31, 2001 we had invested
$569,389 in equipment and had capital and lease costs of $193,631 in calendar.
Due to the high costs and low revenues in the European application
service provider (ASP) market, in 2002 our management decided to transition our
focus away from pan-European wireless application service providers, and toward
installing and licensing our middleware technology at cellular operators and
wireless application service providers worldwide, and to operate through
original equipment manufacturers and regional sales representatives to sell our
products. Therefore, our management decided to liquidate, or allow the
liquidation of the UK subsidiary, m-Wise Ltd, and its three subsidiaries in
Italy, France and Spain, by creditors and local legal authorities. These
subsidiary companies have effectively ceased conducting business, and the
liquidation process is expected to take place within the next few months. As of
June 30, 2003 we invested $3.2 million in the UK subsidiary and its
subsidiaries, our financial statements include the financial statements of those
subsidiaries as the liquidation process of these subsidiaries is not yet
finalized. This investment, which is actually an intercompany loan, is
eliminated in the statements among the intercompany balances.
Our shift away from hosted wireless application services using our
gateway enabled us to focus more on the core middleware benefits of our
technology in fiscal 2002. This shift toward installed gateways also coincided
with growing interest, as documented by wireless industry analysts such as Ovum,
among cellular operators and service providers for wireless middleware's
capability to support strategic service delivery.
In fiscal 2002 we channeled our research and development efforts to
enhance and update our middleware technology to interface with advanced and
emerging wireless technologies such as MMS (Multimedia Messaging Service -
delivery of highly enhanced images and audio files) and J2ME. We also upgraded
our middleware platform to incorporate modules for application deployment and
management, for centralized management of multiple value added services and
multiple third-party content and media providers, and for managing increased
data traffic and real-time billing and reporting requirements.
11
We also focused our efforts during this period toward establishing
distribution channels via original equipment manufacturers and partnerships with
major IT vendors and system integrators. During this period, we took important
steps to move from a direct sales strategy to using channel partners and
original equipment manufacturers to distribute our products. We are therefore
building partnerships with large original equipment manufacturers and system
integrators that already have large sales teams, existing relationships with
cellular operators, the visibility and brand value to interest potential new
clients and the requisite financial backing to support the long sales cycle and
finance our customers where necessary. We have formed agreements with
Hewlett-Packard in Asia for Hewlett-Packard to license, install and support our
MOMA Gateway for cellular operators in Asia, and with Comverse's subsidiary,
Starhome, to host our MOMA Gateway at the Starhome facilities and sell hosted
wireless value added services to cellular operators using our MOMA Gateway.
There is no guarantee that these partnerships will generate revenues, or that
new partnerships will be formed.
Revenues
We have experienced rapid revenue growth during the last three years.
Our revenues grew from $26,216 in the year ended December 31, 2000 to $1,619,112
in the year ended December 31, 2002. For the six months ended June 30, 2003 our
revenues were $275,877. We derive revenues from product sales, licensing,
revenue share, customer services and technical support.
Customers and customer concentration. Historically we have derived the
majority of our revenues from a small number of customers and, although our
customer base is expanding, we expect to continue to do so in the future. In the
year ended December 31, 2002, approximately 73% of our sales were from sales to
three customers, and 36% of sales were to one customer.
Geographical breakdown. We sell our products primarily in Europe and
the Far East. For the year ended December 31, 2002, we derived 75% of our
revenues from sales in Europe and 25% of our revenues from sales in the Far
East.
Operating expense
Research and development. Our research and development expenses consist
primarily of salaries and related expenses of our research and development
staff, as well as subcontracting expenses. All research and development costs
are expensed as incurred except equipment purchases that are depreciated over
the estimated useful lives of the assets.
General and administrative. Our general and administrative expenses
consist primarily of salaries and related expenses of our executive, financial,
administrative and sales and marketing staff. These expenses also include costs
of our offices in Europe, professional advisors such as legal and accounting
experts, depreciation expenses as well as expenses related to advertising,
professional expenses and participation in exhibitions and tradeshows.
Financing income and expenses
Financing income consists primarily of interest earned on our cash
equivalents balances and other financial investments and foreign exchange gains.
Financing expenses consist primarily of interest payable on bank loans and
foreign exchange losses.
Critical Accounting Policies. We prepare our consolidated financial
statements in conformity with accounting principles generally accepted in the
U.S. As such, we are required to make certain estimates, judgments and
assumptions that we believe are reasonable based upon the information available.
These estimates and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
the periods presented. To fully understand and evaluate our reported financial
results, we believe it is important to understand our revenue recognition
policy.
12
Revenue recognition. Revenues from products sales are recognized in
accordance with Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial Statements" ("SAB No. 101") when delivery has occurred provided there
is persuasive evidence of an agreement, the fee is fixed or determinable and
collection of the related receivable is probable.
Technology license revenues are recognized in accordance with SAB No.
101 at the time the technology and license is delivered to the customer,
collection is probable, the fee is fixed and determinable, a persuasive evidence
of an agreement exists, no significant obligation remains under the sale or
licensing agreement and no significant customer acceptance requirements exist
after delivery of the technology.
Revenue share is recognized as earned based on usage. Usage is
determined by receiving confirmation from the users.
Revenues relating to customer services and technical support are
recognized as the services are rendered ratably over the period of the related
contract.
Results of operations
Six months ended June 30, 2003 compared to six months ended June 30, 2002
Revenues
Revenues decreased 39% to $275,877 for the six months ended June 30,
2003 from $452,990 for the same period in 2002, primarily due to our
restructuring process and the change in the sales strategy involving a
transition from direct sales to indirect sales (mainly local sales
representatives and original equipment manufacturers agreements) that has
resulted in fewer sales as the sales cycles become longer.
Operating expenses
Research and development. Research and development expenses decreased
56% to $ 348,336 for the six months ended June 30, 2003 from $ 786,034 for the
same period in 2002. This decrease was primarily due to $ 144,345 in
subcontractors expenses, which reflects the trend of developing solutions for
our customers' specific order requirements. Research and development expenses,
stated as a percentage of revenues, decreased to 126 % for the six months ended
June 30, 2003, from 174% for the same period in 2002.
General and administrative. General and administrative expenses
decreased 10% to $941,593 for the six months ended June 30, 2003 from $
1,043,939 for the same period in 2002. The decrease in general and
administrative expenses was primarily due to $407,392 in marketing expenses,
$81,250 related to office rent expenses and $97,204 of travel expenses,
partially offset by an expense in the amount of $319,918 that was recorded in
the six months ended June 30, 2003 due to options granted for employee services.
General and administrative expenses as a percentage of revenues increased to
341% for the six months ended June 30, 2003 from 230% for the same period in
2002.
Financing income and expenses
Financing income. Our financing income decreased 92% to $42 for the six
months ended June 30, 2003 from $518 for the same period of 2002.
Financing expenses. Our financing expenses increased 411% to $25,582
for the six months ended June 30, 2003 from $5,003 for the same period of 2002
due to foreign currency losses.
Three months ended June 30, 2003 compared to Three months ended June 30, 2002
13
Revenues
Revenues decreased 65% to $83,553 for the three sale months ended June
30, 2003 from $238,962 for the same period in 2002, primarily due to the
restructuring process and the change in the sales strategy involving a
transition from direct sales to channel sales that has resulted in fewer sales
as the sales cycles become longer.
Operating expenses
Research and development. Research and development expenses decreased
71% to $108,485 for the three months ended June 30, 2003 from $376,964 for the
same period in 2002. This decrease was primarily due to $102,036 in
subcontractors expenses, which reflects the trend of developing solutions for
our customers' specific order requirements. Research and development expenses,
stated as a percentage of revenues, decreased to 130 % for the three months
ended June 30, 2003, from 158% for the same period in 2002.
General and administrative. General and administrative expenses
decreased 14% to $400,995 for the three months ended June 30, 2003 from $467,956
for the same period in 2002. The decrease in general and administrative expenses
was primarily due to $170,202 in marketing expenses, $31,746 related to
communications expenses and $40,449 of travel expenses, partially offset by an
expense in the amount of $170,000 that was recorded in the three months ended
June 30, 2003 due to legal services rendered to the company. General and
administrative expenses as a percentage of revenues increased to 480% for the
three months ended June 30, 2003 from 196% for the same period in 2002.
Financing income and expenses.
Financing income. Our financing income decreased 69% to $4 for the
three months ended June 30, 2003 from $13 for the same period of 2002.
Financing expenses. Our financing expenses increased 793% to $21,412
for the three months ended June 30, 2003 from $2,399 for the same period of 2002
due to foreign currency losses.
Year ended December 31, 2002 compared to year ended December 31,2001 Revenues
Revenues increased 176% to $1,619,112 for the year ended December 31,
2002 from $585,894 for the same period in 2001.
Operating expenses
Research and development. Research and development expenses increased
1% to $1,923,806 for the year ended December 31, 2002 from $1,908,777 for the
same period in 2001. This increase was primarily due to an increase of $139,957
in material expenses and $ 42,357 in travel expenses partially off set by a
$147,683 decrease in salaries expenses. Research and development expenses,
stated as a percentage of revenues, decreased to 119% for the year ended
December 31, 2002 from 326% for the same period in 2001.
General and administrative. General and administrative expenses
decreased 29% to $1,924,661 for the year ended December 31, 2002 from $2,720,030
for the same period in 2001. This decrease was primarily due to a decrease of
$286,847 in salaries expenses, $215,549 decrease in consulting expenses and
$178,723 in marketing expenses. General and administrative expenses as a
percentage of revenues decreased to 119% for the year ended December 31, 2002
from 464% for the same period in 2001.
14
Liquidity and capital resources
Our principal sources of liquidity since our inception have been
private sales of equity securities, stockholders loans, borrowings from banks
and to a lesser extent, cash from operations. We had cash and cash equivalents
of $38,162 as of June 30, 2003 and $215,575 as of December 31, 2002. Our initial
capital came from an aggregate investment of $1.3 million from Cap Ventures Ltd.
To date, we have raised an aggregate of $5,300,000 from placements of our equity
securities (including the investment by Cap Ventures and a $4,000,000 investment
by Syntek Capital AG and DEP Technology Holdings Ltd.). We have also borrowed an
aggregate of $1,800,000 from Syntek Capital AG and DEP Technology Holdings Ltd.
(See "Certain Transactions") and as of June 30, 2003 we had no funds available
to us under bank lines of credit. Apart from a credit line agreement with
Miretzky Holdings Ltd., under which we have received approximately $300,000 as
of June 30, 2003, we do not have any agreements or understandings with respect
to sources of additional capital. The credit line is for $300,000, and is
repayable only upon three days prior notice by Miretzky. The credit line has no
determination date and does not provide for interest payments. We will need $1.0
million for the next twelve months for our operating costs which mainly include
salaries, office rent, network connectivity and working capital. We intend to
finance this amount from our ongoing sales and through the sale of either our
debt or equity securities or a combination thereof, to affiliates, current
stockholders and/or new investors.
Operating activities. For the six months ended June 30, 2003 we used
$230,574 of cash in operating activities primarily due to our net loss of
$1,039,592 , partially offset by an amount of $ 463,282 issuance of securities
for services.. In the same period in 2002, we used $1,446,203 of cash in
operating activities primarily due to our net loss of $ 1,381,468 and from a
$220,179 increase in accounts receivable and other current assets . For the year
ended December 31, 2002, we used $1,218,613 of cash in operating activities
primarily due to our net loss of $2,255,988, partially offset by a $714,842
increase in trade accounts payable and $218,121 depreciation expenses. In the
same period in 2001, net cash used in operating activities totaled $3,764,249
primarily due to our net loss of $4,042,913 and a $183,689 increase in accounts
receivable and other current assets.
Investing and financing activities.
Property and equipment consist primarily of computers, software, and
office equipment.
For the six months ended June 30, 2003, net cash used in investing
activities was $22,352 investment in equipment purchases. For the same period in
2002, net cash used in investing activities was $222,666 investment in equipment
purchases. For the year ended December 31, 2002, net cash used in investing
activities was $310,964 investment in equipment purchases. For the same period
in 2001, net cash used in investing activities was $281,653 investment in
equipment purchases.
For the six months ended June 30, 2003, net cash provided by financing
activities was $13,988 increase in bank indebtedness. For the same period in
2002, net cash provided by financing activities was $1,289,167 due to $1,300,000
shareholders' loan received, partially offset by a decrease of $10,833 in bank
indebtedness.
Market Risk
We do not currently use financial instruments for trading purposes and
do not currently hold any derivative financial instruments that could expose us
to significant market risk.
Corporate Tax Rate
Our net operating loss carry-forwards in the United States for tax
purposes amount to approximately $7.7 million as of June 30, 2003.
Impact of Inflation and Currency Fluctuation
Substantially all of our revenues are denominated in dollars or are
dollar-linked, but we incur a portion of our expenses, principally salaries and
related personnel expenses in Israel, in New Israeli Shekels (NIS). In 2002,
48%, and in the three months ended June 30, 2003, 34%, of our costs were
incurred in NIS. As a result, we are exposed to the risk that the rate of
inflation in Israel will exceed the rate of devaluation of the NIS in relation
to the US Dollar or that the timing of this devaluation will lag behind
inflation in Israel. In that event, the dollar cost of our operations in Israel
will increase and our dollar-measured results of operations will be adversely
affected.
15
Our auditors have included an explanatory paragraph in their report on
our financial statements, relating to the uncertainty of our business as a going
concern, due to our limited operating history, our lack of historical
profitability, and limited funds. Management believes that it will be able to
raise the required funds for operations from bank financings, or from one or
more future offerings, and to be able to achieve our business plan. Risks
inherent in the business as discussed under the caption "Risk Factors" may
affect the outcome of Management's plans.
16
BUSINESS
Background
We were incorporated in Delaware in February 2000 under the name of
Wireless Auctions, Inc. We develop, manufacture, market and support a software
and hardware-based wireless application gateway marketed under the brand MOMA
Gateway. The MOMA Gateway enables cellular operators and wireless application
service providers, to provide data and multimedia value-added services and
content to their wireless subscribers. Our gateway is an end-to-end application
and middleware platform that includes monitoring, billing, reporting, content
management, customer care, application development, generic application engines,
third-party provisioning and centralized third-party management tools. These
services are called value-added services in the wireless industry. Our platforms
have been utilized since March 2000 in over 300 applications across more than 20
European and Asian networks for over 50 various internationally known content
and media providers. These include applications such as games, information
services, alerts, advertising and promotions, which were developed and delivered
on a hosted basis for content and media providers, through our wholly-owned UK
subsidiary and its Italian, French and Spanish subsidiaries. In the second half
of 2002, we ceased operating and owning hardware infrastructure in order to
concentrate on licenses and installed sales of our technology, and the
operations of the UK and its European subsidiaries were discontinued.
We operate mainly through m-Wise Ltd., our wholly-owned subsidiary in
Israel. We currently sell our MOMA Gateway directly and through representative
offices in Taiwan and Singapore. In addition, we have entered into "prime
contractor" arrangements with Siemens and Ericsson EMEA, for the provision of
the MOMA technology to their customers. With Siemens, our three contracts to
date have consisted of a subcontractor arrangement. We are currently pursuing
two projects with Ericsson and under the agreement they are will introducing us
to their customers. There can be no assurance that these arrangements will
secure agreements with customers in the near future, if at all.
Industry Background
Growing Market for Value-added Services.
The wireless communications market primarily consists of cellular
telephone networks, but also includes pagers, personal digital assistants, and
private mobile networks such as those used by utility companies and delivery
services. Value added services constitute significant additional revenue sources
for wireless networks, and have become essential components of cellular services
in only a few years. This has been documented by industry analysts and
journalists, as well as by the financial reports from various cellular operators
that describe data services as a growing percentage of the carriers' revenues.
Originally utilized solely for telephone communications, the wireless
phone networks have added data and multimedia content for the benefit of their
subscribers, such as:
o SMS - short message service - enables subscribers to send and receive
short (160 character) text messages and graphics images;
o EMS - enhanced message service - enables subscribers to send and
receive high quality images and graphics;
o MMS -multimedia messaging service - enables the delivery of further
enhanced images and audio files;
o WAP - web application protocol - enables subscribers to access the
internet and send and receive email;
o Interactive media, such as quizzes and online gaming, including Java
(J2ME) technology;
o Subscriber information, such as stock quotes or sports news;
17
o "Push" technology, enabling content providers to broadcast
advertisements to subscribers; and
o Entertainment media, including radio stations, music and magazines.
Our technology is referred to as middleware as it integrates the
wireless telecommunications providers and mainstream information technology
industries. Providers developing middleware technology supply a means of
integrating the wireless telecommunications providers, mainstream IT, and
content and media provider industries to deliver value added services to
wireless subscribers. The introduction of the wireless value added services
industry has put an onus on cellular operators and service providers to use
their internal operational infrastructure as an externally-facing, strategic
service delivery platform. Wireless middleware technology seeks to form a
crucial part of this platform, thus facilitating the cellular operators and
service providers' efforts to connect to content partners and then deliver
compelling services to their wireless subscriber base, regardless of the device
used by the subscribers.
Growing Importance of Middleware
Our MOMA Gateway provides a centralized approach to middleware. We view
the role of our middleware as central to the service offering by reducing the
complexity in the supply chain. Wireless operators and wireless application
service providers currently negotiate with a large number of industry players to
deliver content, including access providers, payment providers, content
aggregators and applications developers. We emphasize our business value as
reducing service development costs for wireless operators and wireless
application service providers by providing a single horizontal platform on which
to build and deliver value added services, and on which to manage value added
services content and billing relationships. We believe that the single
middleware solution reduces the time spent negotiating with third parties to
implement and run new services and then manage those agreements.
We believe that middleware will play a central role in the wireless
operator and wireless application service providers service delivery offering.
The core middleware will be installed on the operator and wireless application
service provider's network to fulfill the functions of service development and
management, with smaller versions of the gateway installed at the operator or
wireless application service providers' subsidiaries in additional geographic
markets to share central sources of information. This approach lowers the costs
for the operator by centralizing the processes that are currently built
individually by content provider, geographic market and other criteria.
The m-Wise Strategy
We believe that we were early to recognize the role of middleware in an
increasingly complex platform strategy, and that we positioned ourselves to
successfully prove the capacity of our application gateway to act as middleware
for wireless value added services regardless of different standards, device
types and billing standards. One of the ways in which we are promoting our
middleware technology is by addressing wireless operators and wireless
application service providers requirements for a centralized platform on which
to build and manage value added services content and applications from a number
of different providers. In a similar approach, we are targeting wireless
application service providers in order to provide them with a centralized
platform on which to develop and deliver their own service offering.
The m-Wise Solution
Our MOMA Gateway middleware provides operators and service providers of
wireless data systems an end-to-end range of functionalities necessary to
develop, manage and launch wireless value added services and transactions. These
functionalities include, among others, the ability to:
o Minimize the capital, commercial, training and technical requirements
by providing a common platform for the operator or wireless application
service providers IT, marketing, customer care and billing departments
to manage current and next-generation wireless value added services;
18
o Minimize costs by providing a common platform for all third-party
content and service providers to connect and bill through the operator
or wireless application service providers wireless network;
o Increase value added services revenues by accelerating the time to
market for third-parties, and by increasing the number of content
providers, media companies and other enterprises able to enter the
wireless value added services market;
o Eliminate the common problem of un-billed premium value added services
for pre-paid wireless subscribers by integrating in real-time with the
operators legacy pre-paid billing system to ensure that an adequate
pre-paid account balance exists prior to delivering the value added
services to the subscriber;
o Centralize and itemize the operator or wireless application service
providers reporting and billing for all value added services by third
party, delivery channel (e.g. SMS, MMS or other) or billing mechanism
(e.g. premium messaging, IVR, pre-paid data-card or other); and
o Mitigate many typical problems, such as real-time billing, anti-spam
policies, itemized value added services billing and adequate customer
support, through the delivery of a live window and centralized controls
for all value added services, billing modules and third-party
providers.
Products
We develop, manufacture, market and support a software and
hardware-based wireless application gateway marketed under the brand MOMA
Gateway (MOMA is a middleware, i.e. a bundle of hardware and software parts that
together provide all the functionalities described). The hardware consists of
off the shelf products that our customers purchase per our specifications or
that we purchase on their behalf, typically for no additional consideration
other than the cost of such hardware components. The main software that runs
these hardware components consists of the MOMA proprietary software code we
developed through the years. In addition, we use standard off the shelf software
and freeware (such as Linux, JSP, Microsoft SQL, Checkpoint's firewall
solutions, Tomcat), for which we purchase licenses for our use or on behalf of
our customers.
We provide our customers with various services, such as standard-level
product support and maintenance, product upgrades (typically at a fee of 15% of
initial license price per year), and remote management and service monitoring,
that are priced separately. The MOMA Gateway software is designed to enable its
users to customize and manage certain aspects of the product, such as the "look
and feel" of the user interface, the language of the user interface, and the
connection of the MOMA Gateway to external services. Further customization, when
required, is also priced in addition to the license fee.
Our MOMA Gateway, embodied in hardware and software technology,
provides operators of mobile data systems the capability to offer the above
services and other interactive content. Our technology facilitates necessary
billing and customer service functions and interfaces with commercially
available media content.
Customers
Our current wireless data customers include prominent global wireless
application service providers and wireless operators. For 2002, 36% of our
revenues were derived from our contract with one customer and 73% with three
customers.
Partners
We primarily operate through original equipment manufacturers and
regional sales representatives to distribute and sell our products. We are
currently negotiating additional agreements, but to date we have formed
partnerships with Hewlett-Packard in Asia for installed middleware sales to
cellular operators and with Comverse's subsidiary, Starhome, for hosted gateway
sales to cellular operators worldwide. Pursuant to the partnership formed with
Hewlett-Packard in Asia, we have jointly approached several mobile operators in
the Far East, whereby Hewlett-Packard would be the prime contractor, integrator
and hardware provider and we would license the use of our technology for any
such products sold. We also have recently established a prime-contractor
relationship with Siemens globally and Ericsson EMEA. Under these contracts, a
wireless carrier requests a major vendor to be the front supplier on our behalf,
in return for a certain mark-up, typically 20-30%. There is no guarantee that
these partnerships will generate revenues, or that new partnerships will be
formed.
19
We have formed partnerships with several market leading content
aggregators and creators, which aggregates value added services content and
applications from dozens of providers around the world. These agreements enable
us to, where required by our cellular operator or wireless application service
providers clients, also provide value added services content and applications
along with our middleware licenses.
Research and Development
We devote significant resources to research and development. In January
2003 we were jointly awarded with Hewlett Packard an SIIRD Grant (a joint
Israeli Singapore government grant of $186,343 USD) to upgrade the MOMA Gateway
to support MMS and J2ME (Java technology for wireless applications) for wireless
carriers in the Far East. This grant was partially funded during the 6 months
ended June 30, 2003 and is reflected in our financial statements. We expect to
continue significant research and development activities to integrate new
technologies into our gateway. During the years ended December 31, 2001 and 2002
we expended $1,908,777 and $1,923,806, respectively, on research and development
activities.
Our Israeli subsidiary, m-Wise Ltd., was granted an "Approved
Enterprise" status from the Israeli Ministry of Industry and Trade, for the
expansion of its facilities in the city of Herzeliya in Israel. The Approved
Enterprise status grants the subsidiary certain tax benefits and requires it to
fulfill certain conditions and criteria, such as notify the Ministry with
respect to, for example, the progress of and any change in its performance or
its corporate structure and operations. Also, the subsidiary is required to
obtain approval from the Ministry for certain transactions, including changes in
its corporate equity holding of more than 49% of its ownership, whether by
private placement or a public offering on a stock exchange.
Intellectual Property
Our intellectual property rights are important to our business. We
protect our intellectual property rights with a combination of copyright, the
use of contractual provisions with our customers and partners embodied in our
license and partnership agreements, and procedures to maintain the
confidentiality of trade secrets. Most of our intellectual property is embodied
in software. The functionality of all software can eventually be reverse
engineered, given enough time and resources. We rely on common law for
protection of our trademarks "MOMA Gateway" and "m-Wise".
Competition
We encounter competition from numerous competitors, including hundreds
of smaller companies addressing niche content markets. Our larger competitors
include Cash-U Mobile Technologies Ltd. in SMS and MMS, Mobilitech, Inc. in J2ME
and centralized technology platforms (middleware), Akumitti Ltd. in digital
content platforms, Openwave Systems Inc. in application platforms, and LogicaCMG
and Materna GmbH Information & Communications in the middleware arena. We
believe our competitive strengths are our superior technology, which was greatly
enhanced since its release, and our technical experience in integrating our
middleware with various third-party technologies already existing within the
cellular operator or wireless application service providers network (e.g. SMSCs,
MMSCs and legacy billing systems). We also believe our competitive strengths are
further enhanced by our strong presence in the market through our sales to large
local and global content providers in each of the relevant vertical markets,
partnering with industry-leading global and regional OEM/channel partners as
well as local sales representatives, flexibility, and commercial experience in
the industry.
20
Employees
Along with our subsidiaries we employ an aggregate of 12 employees,
including our officers. Two employees (Messrs. Broudo and Ben-Asulin) are
employed by m-Wise and 10 employees are employed by m-Wise Israel, two of whom
also provide their services to us (Messrs. Kabazo and Lewin). All employment
agreements with officers and directors are described under the caption
"Executive Compensation". We believe our employee relations to be excellent.
None of our employees is represented by a labor union, and all are employed on a
full-time basis.
Since we have determined to pursue an aggressive objective, which will
require us to maintain competitive advantages in a range of areas, we intend to
maintain a small core of highly skilled technical experts in key areas. This
team will be responsible for maintaining the leadership of the technology
platform, designing the future technology upgrades and products, and utilizing
outsourced development firms on an as-needed basis to implement the necessary
codes and assist in dealing with peaks derived from sales and projects.
We anticipate that managing growth during 2004-2005 while maintaining a
small core team will require us to hire, as required by growing sales volumes
and distribution channels, a few additional personnel for technical support,
account management and sales support for the distribution channels.
Israeli law and certain provisions of the nationwide collective
bargaining agreements between the Histadrut (General Federation of Labor in
Israel) and the Coordinating Bureau of Economic Organizations (the Israeli
federation of employers' organizations) apply to our Israeli employees. These
provisions principally concern the maximum length of the work day and the work
week, minimum wages, paid annual vacation, contributions to a pension fund,
insurance for work-related accidents, procedures for dismissing employees,
determination of severance pay and other conditions of employment. We provide
our employees with benefits and working conditions above the required minimum.
Furthermore, pursuant to such provisions, the wages of most of our employees are
subject to cost of living adjustments, based on changes in the Israeli CPI
(Consumer Price Index). The amounts and frequency of such adjustments are
modified from time to time. Israeli law generally requires the payment of
severance pay upon the retirement or death of an employee or upon termination of
employment by the employer or, in certain circumstances, by the employee. We
typically fund our ongoing severance obligations for our Israeli employees by
making monthly payments for managers insurance policies and severance funds.
Israeli law provides that employment arrangements with employees who
are not in senior managerial positions, or whose working conditions and
circumstances do not facilitate employer supervision of their hours of work,
must provide for compensation which differentiates between compensation paid to
employees for a 45 hour work week or for maximum daily work hours and
compensation for overtime work. The maximum number of hours of overtime is
limited by law. Certain of our employment compensation arrangements are fixed
and do not differentiate between compensation for regular hours and overtime
work. Therefore, we may face potential claims from these employees asserting
that the fixed salaries do not compensate for overtime work, however, we do not
believe that these claims would have a material adverse effect on us.
Facilities
Our offices are located at 10 Hasadnaot Street, Herzeliya Pituach,
Israel 46728, in leased office space of approximately 250m2, which we believe is
adequate for our current and future operating activities.
Israeli Tax Consideration
Pursuant to the Law for the Encouragement of Capital Investments
(1959), the Government of the State of Israel, through the Investment Center,
has granted an "Approved Enterprise" status to our Israeli subsidiary's facility
in Herzelyia. Consequently, we are eligible for certain tax benefits for the
first several years in which we generate taxable income. We have not, however,
begun to generate taxable income for purposes of this law and we do not expect
to utilize these tax benefits for the near future. The benefits available to an
approved enterprise are dependent upon the fulfillment of certain conditions and
criteria. If we fail to comply with these conditions and criteria, the tax
benefits that we receive could be partially or fully cancelled and we could be
forced to refund the amount of the benefits we received, adjusted for inflation
and interest. We currently believe that we will be entitled to receive these
benefits, although there can be no assurances that we will be able to do so at
this time. From time to time, the Government of Israel has discussed reducing or
limiting the benefits. We cannot assess whether these benefits will be continued
in the future at their current levels or at all.
21
Legal Proceedings
On January 10, 2003, Marsa Holdings Limited ("Marsa") filed a
Winding-Up Petition in the High Court of Justice, Chancery Division, Companies
Court for a compulsory liquidation order against the UK subsidiary, m-Wise
Limited. The Petition was filed with respect to a debt in the amount of
(pound)34,728.97 due by m-Wise UK to Marsa under a certain lease agreement. The
first hearing was held on February 26, 2003, and an order was made adjourning
the petition to April 9, 2003. m-Wise has not contested this procedure, and
subsequently Marsa has dismissed the Petition. We intend to dissolve the UK
subsidiary. As a result, we believe the Petition will have no effect upon us. We
did not guarantee the liabilities of m-Wise Limited and the adverse adjudication
of this matter will have no impact on our results of operations. All assets of
this subsidiary have been written off.
Other than the legal proceedings described above, we are not a party to
any material legal proceedings.
MANAGEMENT
Directors and Executive Officers
The members of our Board of Directors serve until the next annual
meeting of stockholders, or until their successors have been elected. The
officers serve at the pleasure of the Board of Directors. The following are our
directors and executive officers. All officers dedicate their full business time
to our operations.
Name Age Position
---- --- --------
Mordechai Broudo 44 Chief Executive Officer and Director
Shay Ben-Asulin 35 Chairman of the Board and Secretary
Gabriel Kabazo 30 Chief Financial Officer
Asaf Lewin 38 Chief Technology Officer
Mr. Mordechai Broudo is one of our co-founders and has been a director
since our inception. Mr. Broudo has been acting as our Chief Executive Officer
since June 2001. Before founding m-Wise, Mr. Broudo was the Chief Technology
Officer of Need2Buy.com, Inc., now known as River One Inc., was funded by
Mitsubishi and several leading venture capital firms, from November 1999 to
March 2000. River One provides management software and services for
manufacturers to control processes between customers and suppliers. From January
1997 to April 1998, Mr. Broudo served as the Managing Director of the New York
office of Mercado DTL, a provider of advanced intelligent data management
systems. Mr. Broudo received a Bachelors Degree in Computer Science from Queens
College, New York, in 1991.
Mr. Shay Ben-Asulin is one of our co-founders and has been a director
since our inception. Mr. Ben-Asulin has been acting as our President and
Chairman of the Board of Directors since June 2001, focusing mainly on our
European operations, corporate strategy and funding and product planning. Before
founding m-Wise, Mr. Ben-Asulin served as the Business Development and Wireless
Content Manager, from April 1999 to March 2000, of PassCall Advanced
Technologies Ltd., an Israeli start-up company based in New York, focused on
web-based content and applications to wireless phones. In this position, Mr.
Ben-Asulin acquired extensive knowledge and expertise of the wireless
communications market, and developed sales and business development channels
with US cellular operators, system integrators and media companies. From January
1998 to September 1999, Mr. Ben-Asulin served as the Chief Executive Officer of
Mishin Investments Ltd., a privately-owned company that promoted multinational
projects and investments in the Middle East region through business alliances in
Israel and countries such as Jordan, Oman, Qatar and Egypt.
22
Mr. Gabriel Kabazo, CPA, has served as our Chief Financial Officer
since October 2002. From August 2000 to September 2002, Mr. Kabazo was the
Controller of On Track Innovations Ltd., a high-tech manufacturing company in
the business of contactless smart cards traded on the NASDAQ, with several
subsidiaries worldwide (North America, South Africa, Asia and Europe) and over
200 employees, where he supervised the finance and accounting activities of the
various subsidiaries, the ongoing management of the accounting department,
preparation of budget plans, financial reports and reports to the SEC. Mr.
Kabazo has led several initiatives to enhance efficiency and reduce company
spending as required from market conditions and played a principal role in the
preparation of On Track Innovations Ltd.'s public offering, working closely with
company management, external attorneys and underwriters. From December 1997 to
July 2000, Mr. Kabazo worked as a CPA, Senior Level, at Luboshitz Kasierer, one
of Israel's leading CPA firms. Mr. Kabazo received a Bachelors Degree in
Accounting and Economics from the Faculty of Management of Tel-Aviv University
in 1997 and is a Certified Public Accountant registered in Israel since 1999.
Mr. Asaf Lewin has served as our Chief Technology Officer since June
2001. From August 2000 to September 2000, Mr. Lewin was a co-founder and
managing director at eCaddo Ltd., an Israeli start-up company in the field of
scheduling/pricing solutions for online directories. Mr. Lewin founded eCaddo in
March 2000. From 1995 to March 2000, Mr. Lewin oversaw the development of
several extensive visual reconnaissance systems at Elron Software (a wholly
owned subsidiary of Elron Electronic Industries and a recognized global leader
in the development of innovative technology products and services for advanced
networking and Internet infrastructures), in the capacity of division manager.
Prior to his engagement by Elron Software in 1995, Mr. Lewin was engaged by the
development team at the Israeli Air Force Avionics Software Center, where he
participated in numerous research and development projects in a variety of
languages and development environments. He was honored with an award of
excellence from the Israeli Air Force Commander for a certain project. Mr. Lewin
received a Bachelors Degree (cum laude) in Aeronautical Engineering from the
Israeli Technion (the Israel Institute of Technology) in 1988.
Audit Committee
We do not have an audit committee. The entire Board of Directors serves
as the audit committee. Because of our small size and the risk attendant to a
small public company, we are currently unable to attract an audit committee
financial expert to our Board of Directors.
Executive Compensation
The following table sets forth the cash and all other compensation paid
to our executive officers and directors during each of the last three fiscal
years, including compensation from our subsidiaries. The remuneration described
in the table includes our cost of any benefits which may be furnished to the
named executive officers, including premiums for health insurance and other
benefits provided to such individual that are extended in connection with the
conduct of our business. This table does not include certain options to purchase
Series B preferred stock granted to corporations controlled by Messrs. Broudo
and Ben-Asulin (272,413 and 283,994 shares, respectively) since such options
were granted in order to provide for anti-dilution protection, and not in
connection with such individuals' employment.
23
Summary Compensation Table
===============================================================================================================================
ANNUAL COMPENSATION LONG TERM COMPENSATION
- -------------------------------------------------------------------------------------------------------------------------------
Awards Payouts
----------------------------- -----------
Restricted Securities
Name and Other Annual stock Underlying LTIP All
Principal Position Year Salary Bonus Compensation Awards ($) Options SARs(#) Payouts ($) Compensation
- ------------------ ---- ------ ----- ------------ ---------- --------------- ----------- ------------
Shay Ben-Asulin 2002 $109,992 0 0 0 0 0 0
Chairman of the Board 2001 126,498 0 0 0 0 0
2000 83,333 0 0 0 0 0 0
Gabriel Kabazo (1) 2002 $ 12,658 0 0 0 0 0 0
CFO 2001 0 0 0 0 0 0
2000 0 0 0 0 0 0 0
Mordechai Broudo 2002 $109,992 0 0 0 0 0 0
CEO 2001 $126,498 0 0 0 0 0 0
2000 $ 83,333 0 0 0 0 0 0
- ----------
(1) Gabriel Kabazo's employment commenced in October 2002. The amounts
shown for Messrs. Ben-Asulin and Broudo include for each $54,996
accrued but not paid in 2002.
Employment Agreements
Mordechai Broudo has an employment agreement dated January 8, 2001, as
amended, pursuant to which he provides us with his services as Chief Executive
Officer, for an initial period of three years, renewed automatically unless
previously terminated. The agreement may be terminated, without cause, upon 90
days notice or by payment of three months salary, or may be immediately
terminated by us, without cause, provided that Mr. Broudo receives six months
severance pay. Mr. Broudo's current salary is $9,166 per month, plus 24 days
paid annual vacation. In addition, we have a repurchase right with respect to
Mr. Broudo's ownership, directly or indirectly (such as through his control of
Proton Marketing LLC), of certain shares, options, warrants or other rights to
acquire our shares, upon termination of Mr. Broudo's employment with us, which
is not termination for "good reason" or without cause. The repurchase right
shall expire on the earlier to occur of January 8, 2004, or upon the occurrence
of certain events.
Shay Ben-Asulin has an employment agreement dated January 8, 2001, as
amended, pursuant to which he provides us with his services as Chairman of the
Board of Directors for an initial period of three years, renewed automatically
unless previously terminated. The agreement may be terminated, without cause,
upon 90 days notice or by payment of three months salary, or may be immediately
terminated by us, without cause, provided that Mr. Ben-Asulin receives six
months severance pay. Mr. Ben-Asulin's salary is $9,166 per month, plus 24 days
paid annual vacation. In addition, we have a repurchase right with respect to
Mr. Ben-Asulin's ownership, directly or indirectly (such as through his control
of Putchkon.com, LLC), of certain shares, options, warrants or other rights to
acquire our shares, upon termination of Mr. Ben-Asulin's employment with us,
which is not termination for "good reason" or without Cause. The repurchase
right shall expire on the earlier to occur of January 8, 2004, or upon the
occurrence of certain events.
24
Asaf Lewin has an employment agreement with the Israeli Subsidiary
dated June 1, 2001, as amended, and serves as our Chief Technology Officer and
the Chief Technology Officer of our Israeli subsidiary. Pursuant to his
employment agreement, he receives NIS 33,000 per month. He also receives a
manager's insurance policy, which will be transferred to him upon termination of
the contract unless his employment is terminated for cause. He also receives a
vocational studies fund from us in the amount of 7.5 % of his monthly salary.
His employment agreement may be terminated upon 3 months notice without cause,
or immediately for cause. He has received an option to purchase 139,354 shares
of our Series B preferred stock, subject to certain vesting schedules and
certain other restrictions.
Gabriel Kabazo has an employment agreement with the Israeli Subsidiary
dated October 1, 2002, as amended, and serves as our Chief Financial Officer and
the Chief Financial Officer of our Israeli subsidiary. Pursuant to his
employment agreement, he receives NIS 15,000 per month. He also receives a
manager's insurance policy, which will be transferred to him upon termination of
the contract unless his employment is terminated for cause. He also receives a
vocational studies fund from us in the amount of 7.5 % of his monthly salary His
employment agreement may be terminated upon one month's notice without cause, or
immediately for cause. He has received an option to purchase 10,500 shares of
Series B preferred stock and 25,000 shares of our common stock, subject to
certain vesting schedules and certain other restrictions.
We adopted an Israel Stock Option Plan (2003) (the "2003 Israeli Plan")
and an International Share Option Plan (2003) (the "2003 International Plan") on
January 16, 2003, by resolution of our Board of Directors and stockholders, and
an Israel Share Option Plan (2001) and an International Share Option Plan (2001)
by resolution of our Board of Directors on February 1, 2001. The Plans enable us
to offer an incentive based compensation system to our employees, directors and
consultants and employees, directors and consultants of our subsidiaries and/or
affiliated companies, except for the Israel Share Option Plan (2001) which does
not allow option grants to directors, in their capacity as such.
No options were granted in 2002.
International Share Option Plan (2001)
The International Share Option Plan (2001) is administered by the Board
of Directors, or a committee appointed by the Board comprised of one or more of
our directors (the "Administrator"). The Plan provides for the grant of
Incentive Stock Options or Nonstatutory Stock Options, as determined by the
Administrator at the time of grant, to our employees, directors and consultants
and of our subsidiaries. There are 50,000 shares of common stock authorized
under the Plan. We may increase the number of shares authorized for issuance
under the International Plan or may make other modifications to the Plan without
stockholder approval, unless required under applicable law, however, no
amendment may adversely change the existing rights of any option holder. As of
the date of this prospectus there were 50,000 options issued under the
International Share Option Plan (2001).
Any options which have been granted but not exercised may again be used
for awards under the Plan. Nonstatutory stock options may be granted to service
providers (employees, directors or consultants of m-Wise and its subsidiaries).
Incentive stock options may only be granted to our directors, officers and
employees employed by us or by our subsidiaries. However, notwithstanding such
designation, to the extent that the aggregate fair market value of the shares
with respect to which incentive stock options are exercisable for the first time
by the optionee during any calendar year exceeds $100,000, such options shall be
treated as nonstatutory stock options. Except for certain circumstances,
incentive stock options may not be granted at an exercise price less than 100%
of the fair market value of the stock as of the date of grant (110% as to any
10% stockholder at the time of grant); non-qualified stock options may not be
granted at a price less than 85% of fair market value of the stock as of the
date of grant (110% as to any 10% stockholder at time of grant).
25
Stock options may be exercised during a period of time fixed by the
Administrator except that no stock option may be exercised more than ten (10)
years (in the case of an incentive stock option, five (5) years if the optionee
holds more than 10% of our voting power, or such shorter term as may be provided
in the option agreement) after the date of grant, provided that upon our
liquidation the vesting of the option may accelerate. If the optionee ceases to
be a service provider as a result of death or disability, then the vested
portion of the option may be exercised within such period of time as set forth
in the option agreement (of at least six (6) months) or for 12 (twelve) months
if the option agreement does not specify such date, but in no event later than
the expiration term of such option as set forth in the option agreement. Except
in the case of options granted to officers, directors and consultants, options
may become exercisable at a rate of no less than 20% per year over five (5)
years from the date of grant. In the discretion of the Administrator, payment of
the purchase price for the shares of stock acquired through the exercise of a
stock option may be made in cash, check, or by delivery of promissory notes or
consideration received by us under a formal cashless exercise program adopted by
us in connection with the Plan, or any combination of the foregoing methods of
payment. Any option granted under the Plan is exercisable according to the terms
of the Plan and of the option agreement and at such times and under such
conditions as determined by the Administrator and set forth in the option
agreement. Shares issued upon exercise of an option are issued in the name of
the Optionee to a trustee, to be held by the trustee on behalf of the optionee
until the initial underwritten public offering of our equity securities. In the
event of a merger by us with or into another corporation, or the sale of
substantially all of our assets, and the successor corporation refuses to assume
or substitute the outstanding options, then the option shall fully vest shall be
fully exercisable for a period of fifteen (15) days from the date of the notice
thereof to the optionee, and the option shall terminate upon the expiration of
such period.
Israel Share Option Plan (2001)
The Israel Share Option Plan (2001) is administered by the Board of
Directors, or a committee appointed by the Board. Our employees and consultants
and employees and consultants of our subsidiaries and affiliates become
participants in the Plan upon receiving option grants. There are 400,612 shares
of common stock authorized under the Plan. We may increase the number of shares
authorized for issuance under the Plan and extend the termination date of the
Plan with the recommendation of the Board of Directors and the approval of the
general meeting of our stockholders. The Plan is designed to conform to Section
102 of the Israeli Income Tax Ordinance and the rules promulgated thereunder,
however, the Board of Directors, may, at its discretion, decide whether an
option shall be granted pursuant to Section 102 or otherwise, to a trustee or
otherwise. Where a conflict arises between any section of the Plan, the option
agreement and the provisions of the law and the rules, the latter shall apply
and the Board of Directors in its sole discretion determines the necessary
changes to be made to the Plan and its determination regarding this matter shall
be final and binding. As of the date of this prospectus there were 400,000
options issued under the Israeli Share Option Plan (2001).
Options may be granted at a value as determined by the Board of
Directors, but not less than $.01 per share. Unless otherwise determined by the
Board of Directors, shares issued upon exercise of options shall be issued and
held by a trustee approved by the Israeli Tax Authorities until the earlier of 8
years of the date of their issue or the completion of an initial public offering
of our securities pursuant to an effective registration statement or similar
document, but in the case of grants pursuant to Section 102, not less then the
period required or approved pursuant to Israeli law, regulations or rules
promulgated thereunder. A grantee who desires to exercise an option granted
directly to him (and not through the trustee) shall so notify us in writing in
such form as shall be prescribed by the Board of Directors from time to time.
The Plan terminates and no option shall be granted after the ten (10) year
anniversary of the Plan.
26
Unless otherwise directed by the Board of Directors, options vest,
subject to certain conditions, at the rate of 1/4 at the end of the first year
and 1/16 every 3 months thereafter. The term of the options shall not be more
than 8 years, provided that, and unless in each case the applicable option
agreement provides otherwise, upon our liquidation 1/2 of the outstanding
options held by or on behalf of a grantee shall be accelerated and become
immediately vested and exercisable and upon the occurrence of certain
"significant events" all outstanding options held by or on behalf on a grantee
shall be accelerated and become immediately fully vested and exercisable. Upon
dismissal of the employee for Cause, all options held by or on behalf of the
grantee immediately expire. If the grantee's employment is terminated as a
result of death, disability or retirement after age 60 with the approval of the
Board of Directors, then the vested portion of the option may be exercised for a
period of 12 (twelve) months.
In the event that a grantee is exempt from vesting periods the Board of
Directors entitled to determine that where the grantee does not comply with the
conditions determined by the Board or Directors or ceases to be an employee, the
trustee, us or a company related to us thereof have the right to repurchase the
shares from the grantee for nominal or any other consideration paid by the
grantee. Any options which have been granted but not exercised may again be used
for awards under the Plan. If m-Wise shares should be registered for trading on
any stock exchange, then the options and/or shares allotted in accordance with
the Plan may be made conditional to any requirement or instruction of the stock
exchange authorities or of any other relevant authority acting pursuant to
applicable law as shall exist from time to time.
International Share Option Plan (2003)
The International Share Option Plan (2003) is administered by the Board
of Directors, or a committee appointed by the Board comprised of one or more of
our directors (the "Administrator"). The Plan provides for the grant of
Incentive Stock Options or Nonstatutory Stock Options, as determined by the
Administrator at the time of grant, to our employees, directors and consultants
and of our subsidiaries. There are 654,390 shares of Series B preferred stock
authorized under the Plan. We may increase the number of shares authorized for
issuance under the International Plan or may make other modifications to the
Plan without stockholder approval, unless required under applicable law,
however, no amendment may adversely change the existing rights of any option
holder. As of the date of this prospectus there were 654,390 options issued
under the International Share Option Plan (2003).
Any options which have been granted but not exercised may again be used
for awards under the Plan. Nonstatutory stock options may be granted to service
providers (employees, directors or consultants of m-Wise and its subsidiaries).
Incentive stock options may only be granted to employees, including officers and
directors, employed by us and by our subsidiaries. However, notwithstanding such
designation, to the extent that the aggregate fair market value of the shares
with respect to which incentive stock options are exercisable for the first time
by the optionee during any calendar year exceeds $100,000, such options shall be
treated as nonstatutory stock options. Except for certain circumstances,
incentive stock options may not be granted at an exercise price less than 100%
of the fair market value of the stock as of the date of grant (110% as to any
10% stockholder at the time of grant); non-qualified stock options may not be
granted at a price less than 85% of fair market value of the stock as of the
date of grant (110% as to any 10% stockholder at time of grant).
Stock options may be exercised during a period of time fixed by the
Administrator except that no stock option may be exercised more than ten (10)
years (in the case of an incentive stock option, five (5) years if the optionee
holds more than 10% of our voting power, or such shorter terms as may be
provided in the option agreement) after the date of grant, provided that upon
our liquidation the vesting of the option may accelerate. If the optionee ceases
to be a service provider as a result of death or disability, then the vested
portion of the option may be exercised within such period of time as set forth
in the option agreement (of at least six (6) months) or for 12 (twelve) months
if the option agreement does not specify such date, but in no event later than
the expiration term of such option as set forth in the option agreement. Except
in the case of options granted to officers, directors and consultants, options
may become exercisable at a rate of no less than 20% per year over five (5)
years from the date of grant. In the discretion of the Administrator, payment of
the purchase price for the shares of stock acquired through the exercise of a
stock option may be made in cash, check, or by delivery of promissory notes or
consideration received by us under a formal cashless exercise program adopted by
us in connection with the Plan, or any combination of the foregoing methods of
payment. Any option granted under the Plan is exercisable according to the terms
of the Plan and of the option agreement and at such times and under such
conditions as determined by the Administrator and set forth in the option
agreement. Shares issued upon exercise of an option are issued in the name of
the Optionee to a trustee, to be held by the trustee on behalf of the optionee
until the initial underwritten public offering of our equity securities. In the
event of a merger by us with or into another corporation, or the sale of
substantially all of our assets, and the successor corporation refuses to assume
or substitute the outstanding options, then the option shall fully vest shall be
fully exercisable for a period of fifteen (15) days from the date of the notice
thereof to the optionee, and the option shall terminate upon the expiration of
such period.
27
Israel Stock Option Plan (2003)
The Israel Stock Option Plan (2003) is administered by the Board of
Directors, or a committee appointed by the Board. Our employees, directors,
service providers and consultants and those of our subsidiaries and affiliates
become participants in the Plan upon receiving option grants. There are 420,246
shares of Series B Preferred Stock authorized under the Plan. We may increase
the number of shares authorized for issuance under the Plan and extend the
termination date of the Plan with the recommendation of the Board of Directors
and the approval of the general meeting of our stockholders. The Plan is
designed to conform to Section 102 of the Israeli Income Tax Ordinance and the
rules promulgated thereunder, however, the Board of Directors, may, at its
discretion, decide whether an option shall be granted pursuant to Section 102 or
otherwise, to a trustee or otherwise. Where a conflict arises between any
section of the Plan, the option agreement and the provisions of the law and the
rules, the latter shall apply and the Board of Directors in its sole discretion
determines the necessary changes to be made to the Plan and its determination
regarding this matter shall be final and binding. As of the date of this
prospectus there were 419,247 options issued under the Israel Srock Option Plan
(2003).
Options may be granted at a value as determined by the Board of
Directors, but not less than $.01 per share. Unless otherwise determined by the
Board of Directors, shares issued upon exercise of options shall be issued and
held by a trustee approved by the Israeli Tax Authorities until the earlier of 8
years of the date of their issue or the completion of an initial public offering
of our equity securities pursuant to an effective registration statement or
similar document, but in the case of grants pursuant to Section 102, not less
then the period required or approved pursuant to Israeli law, regulations or
rules promulgated thereunder. A grantee who desires to exercise an option
granted directly to him (and not through the trustee) shall so notify us in
writing in such form as shall be prescribed by the Board of Directors from time
to time. The Plan terminates and no option shall be granted after the ten (10)
year anniversary of the Plan.
Unless otherwise directed by the Board of Directors, options vest at
the rate of 1/4 at the end of the first year and 1/16 every 3 months thereafter.
The term of the options shall not be more than 8 years, provided that, and
unless in each case the applicable option agreement provides otherwise, upon our
liquidation all of the outstanding options held by or on behalf of a grantee
shall be accelerated and become immediately vested and exercisable and upon the
occurrence of certain "significant events" all outstanding options held by or on
behalf of a grantee shall be accelerated and become immediately fully vested and
exercisable. Upon dismissal of the employee for Cause, all options held by or on
behalf of the grantee immediately expire. If the grantee's employment is
terminated as a result of death, disability or retirement after age 60 with the
approval of the Board of Directors, then the vested portion of the option may be
exercised for a period of 12 (twelve) months.
In the event that a grantee is exempt from vesting periods the Board of
Directors is entitled to determine that where the grantee does not comply with
the conditions determined by the Board of Directors or ceases to be an employee,
the trustee, us or one of our related companies have the right to repurchase the
shares from the grantee for nominal or any other consideration paid by the
grantee. Any options which have been granted but not exercised may again be used
for awards under the Plan. If m-Wise shares should be registered for trading on
any stock exchange, then the options and/or shares allotted in accordance with
the Plan may be made conditional to any requirement or instruction of the stock
exchange authorities or of any other relevant authority acting pursuant to
applicable law as shall exist from time to time.
28
In 2003, the Board of Directors resolved to grant certain of our
service providers and service providers of our subsidiaries an aggregate of
62,712 options to purchase shares of Series B preferred stock under the Israel
2003 Plan, subject to a certain vesting schedule. If a Liquidation Event occurs
prior to July 1, 2005, then the vesting of these options, as well as any
additional options to purchase shares of Series B preferred stock to be granted
in the future under the 2003 International Plan and/or the 2003 Israel Plan, and
unless otherwise determined by the Board of Directors, shall cease forthwith and
such grantees shall have no right to receive or exercise any options not vested
prior to such date. All such unvested options will be granted, fully vested, to
Putchkon.com, LLC (38.46%), Proton Marketing Associates, LLC (38.46%) and
Inter-Content Development for the Internet Ltd. (23.08%).
PRINCIPAL STOCKHOLDERS
The following table sets forth information relating to the beneficial
ownership of our shares of preferred stock and common stock as of the date of
this prospectus by (i) each person known by us to be the beneficial owner of
more than 5% of the outstanding shares of such class (ii) each of our directors
and executive officers, and (iii) the Percentage After Offering assumes the sale
of all shares offered by this prospectus. Unless otherwise noted below, we
believe that all persons named in the table have sole voting and investment
power with respect to all shares of common stock beneficially owned by them. For
purposes hereof, a person is deemed to be the beneficial owner of securities
that can be acquired by such person within 60 days from the date hereof upon the
exercise of warrants or options or the conversion of convertible securities.
Each beneficial owner's percentage ownership is determined by assuming that any
warrants, options or convertible securities that are held by such person (but
not those held by any other person) and which are exercisable within 60 days
from the date hereof, have been exercised. As of the date of this prospectus
there were 5,174,554 shares of our common stock issued and outstanding.
Series A Preferred Stock
Percentage
Name and Address Series A Preferred Percentage of Class After Offering
---------------- ------------------ ------------------- --------------
Cap Ventures, Ltd. 324,562(1) 100% 100%
28 Bezalel St.
Ramat-Gan, Israel 52521
(Dr. Michael Anghel is the Chief Executive Officer of Cap Ventures Ltd.)
(1) Includes 56,180 Shares of Series A Preferred Stock issuable upon
exercise of warrant.
Series B Preferred Stock
Percentage
Name and Address Series B Preferred Percentage of Class After Offering
---------------- ------------------ ------------------- --------------
Shay Ben-Asulin(1) 472,246 86.9% 86.9%
Mordechai Broudo(2) 460,665 86.5 86.5
Inter-Content Development
For the Internet Ltd.(3) 307,668 45.0 45.0
Doron Cohen -
David Cohen, Law Offices(4) 180,441 26.9 26.9
Gabriel Kabazo(5) 10,500 1.0 1.0
Asaf Lewin(6) 139,354 22.1 22.1
(1) Shay Ben-Asulin is the beneficial owner of Putchkon.com, LLC which owns
all these shares and options. Putchkon.com's address is c/o Doron Cohen
- David Cohen Law Offices, 14 Abba Hillel Silver Rd., Ramat-Gan, Israel
52506. Includes 283,994 Shares of Series B preferred stock issuable
upon exercise of fully vested options. Does not include certain
additional options to purchase shares of Series B preferred stock which
Putchkon.com is entitled to receive upon the occurrence of a
Liquidation Event (see "Executive Compensation").
29
(2) Mordechai Broudo is the beneficial owner of Proton Marketing
Associates, LLC, whose address is c/o Doron Cohen - David Cohen Law
Offices, 14 Abba Hillel Silver Road, Ramat-Gan, Israel 52506. Includes
272,413 shares of Series B preferred stock issuable upon exercise of
fully vested options. Does not include certain additional options to
purchase shares of Series B preferred stock which Proton is entitled to
receive upon the occurrence of a Liquidation Event (see "Executive
Compensation").
(3) The address of Inter-Content Development for the Internet Ltd. is 18
Yohanan Ha'Sandlar St., Tel Aviv, Israel 63822. The beneficial owner of
Inter-Content Development for the Internet Ltd. is Mr. Jacob Marinka.
Includes 194,716 Shares of Series B Preferred Stock issuable upon
exercise of fully vested options. Does not include certain additional
options to purchase shares of Series B preferred stock which
Inter-Content Development for the Internet Ltd. is entitled to receive
upon the occurrence of a Liquidation Event (see "Executive
Compensation").
(4) The address of this firm is 14 Abba Hillel Silver Road, Ramat-Gan,
Israel 52506. Includes 180,441 shares of Series B preferred stock
issuable upon exercise of a fully vested warrant.
(5) The address of Gabriel Kabazo is c/o m-Wise. Includes 10,500 shares
issuable upon exercise of fully vested options to purchase Series B
preferred stock.
(6) The address of Asaf Lewin is c/o m-Wise. Includes 139,354 shares
issuable upon exercise of fully vested options to purchase Series B
preferred stock, subject to certain restrictions and limitations (see
"Executive Compensation").
Series C Preferred Stock
Percentage
Name and Address Series C Preferred Percentage of Class After Offering
---------------- ------------------ ------------------- --------------
Miretzky Holdings Ltd. 6,315,258(1) 100% 100%
Clinch's House, Lord Street, Douglas, Isle of Man, IM99 1RZ (PO Box 227)
(1) The beneficial owner of Miretzky Holdings Ltd. is Mark Quirk.
30
Common Stock
Percentage Percentage
Name and Address Common Stock Before Offering After Offering
---------------- ------------ --------------- --------------
Shay Ben-Asulin(1) 3,272,977 39.9% 39.9%
Mordechai Broudo(2) 3,272,978 39.9 39.9
Miretzky Holdings Ltd. (3) 6,315,258 54.9 54.9
Gabriel Kabazo (4) 92,020 1.7 1.7
Asaf Lewin(5) 889,471 14.7 14.7
Inter-Content development
For the Internet Ltd. (6) 1,963,787 30.6 30.6
Doron Cohen -
David Cohen, Law Offices (7) 1,207,701 19.0 19.0
Cap Ventures Ltd. (8) 324,562 5.9 5.9
All officers and directors as a
group (4 persons) (1)(2)(4)(5) 7,527,446 62.1% 62.1%
All above mentioned calculations were made on a fully diluted and as-converted
basis, taking into account the conversion and/or exercise of every share of
preferred stock and all outstanding warrants, options and shares of preferred or
common stock reserved for grant under our employee share option plans.
(1) Shay Ben-Asulin is the beneficial owner of Putchkon.com, LLC, which
owns all these shares. The address of Putchkon.com, LLC is c/o Doron
Cohen - David Cohen, Law Offices, 14 Abba Hillel Silver Rd. Ramat-Gan,
Israel 52506. Includes 258,720 shares of common stock, 1,201,577 shares
of common stock currently issuable upon conversion of 188,252 Shares of
Series B preferred stock and the exercise of fully vested options to
purchase 283,994 shares of Series B preferred stock which are currently
convertible into 1,812,680 shares of common stock. Does not include
certain additional options to purchase shares of Series B preferred
stock which Putchkon.com is entitled to receive upon the occurrence of
a Liquidation Event (see "Executive Compensation").
(2) Mordechai Broudo is the beneficial owner of Proton Marketing
Associates, LLC, which owns all these shares. The address of Proton
Marketing Associates, LLC is c/o Doron Cohen - David Cohen, Law
Offices, 14 Abba Hillel Silver Rd. Ramat-Gan, Israel 52506. Includes
332,640 shares of common stock, 1,201,577 shares of common stock
currently issuable upon conversion of 188,252 Shares of Series B
preferred stock and the exercise of 272,413 fully vested options to
purchase shares of Series B preferred stock which are currently
convertible into 1,738,761 shares of common stock. Does not include
certain additional options to purchase shares of Series B preferred
stock which Proton is entitled to receive upon the occurrence of a
Liquidation Event (see "Executive Compensation").
(3) Includes 6,315,258 shares of Series C preferred Stock, currently
convertible into 6,315,258 shares of common stock. The beneficial owner
of Miretzky Holdings Ltd. is Mark Quirk. The address for Miretzky
Holdings, Ltd. is Clinch's House, Lord Street, Douglas, Isle of Man,
IM99 1RZ (PO Box 227).
(4) Includes 25,000 options to purchase common stock and 10,500 options to
purchase shares of Series B preferred stock which are currently
convertible into 67,020 shares of common stock, granted to Gabriel
Kabazo. The address of Gabriel Kabazo is c/o m-Wise.
(5) Includes 139,354 options to purchase shares of Series B preferred stock
which are currently convertible into 889,471 shares of common stock,
granted to Asaf Lewin, subject to certain restrictions and limitations
(see "Executive Compensation"). The address of Asaf Lewin is c/o
m-Wise.
(6) The address of Inter-Content Development for the Internet Ltd. is 18
Yohanan Ha'Sandlar St., Tel Aviv, Israel 63822. The beneficial owner of
Inter-Content Development for the Internet is Mr. Jacob Marinka.
Includes 720,951 shares of common stock currently issuable upon
conversion of Series B Preferred Stock and 1,242,835 shares of common
stock issuable upon conversion of shares of Series B Preferred Stock
issuable upon exercise of fully vested options. Does not include
certain additional options to purchase shares of Series B preferred
stock which Inter-Content Development for the Internet is entitled to
receive upon the occurrence of a Liquidation Event (see "Executive
Compensation").
31
(7) The address of Doron Cohen - David Cohen, Law Offices is 14 Abba Hillel
Silver Rd. Ramat-Gan, Israel 52506. Includes 1,170,963 shares of common
stock currently issuable upon conversion of 180,441 shares of Series B
Preferred Stock which are issuable upon exercise of a fully vested
warrant, and 36,738 shares of common stock held by the controlling
persons of Doron Cohen - David Cohen, Law Offices.
(8) The address of Cap Ventures Ltd. is 28 Bezalel St., Ramat-Gan, Israel
52521. The Chief Executive Officer and control person of Cap Ventures
is Dr. Michael Anghel. Includes 268,382 shares of Series A preferred
stock and 56,180 shares of series A preferred stock which are issuable
upon exercise of a fully vested warrant.
STOCKHOLDERS' AGREEMENT
Cap Ventures Ltd., Miretzky Holdings Ltd., Proton Marketing Associates,
LLC, Putchkon.com, LLC, and certain other stockholders holding in aggregate of
10,584,483 shares of common stock or shares convertible into common stock (as
converted) have entered into a stockholders' agreement dated January 11, 2001,
agreeing to restrictions on transfer and rights of first refusal on transfer.
Under an Investors' Rights Agreement dated January 11, 2001, we agreed to
provide certain stockholders with demand registration rights, applicable six
months after the effective date of this registration statement (12 months in the
case of a registration statement on Form S-3); to file our reports in accordance
with Section 13 of the Securities Exchange Act of 1934 and otherwise ensure that
its financial information is "publicly available" for purposes of such
investor's resales under Rule 144; provide the investors with copies of our
financial statements on a periodic basis; provide access to our books and
records; obtain key man life insurance in the amount of $1,000,000 on each of
Messrs. Broudo and Ben-Asulin (which has not been complied with ); and provide
the investors with a right of first refusal to purchase newly issued m-Wise
securities. The holders were also granted certain registration rights which are
inapplicable to this registration statement. Certain rights under the Investors'
Rights Agreement terminate immediately prior to a firm commitment underwriting
under the Securities Act, effected on the US, London, Paris or Frankfurt Stock
Exchanges, provided such firm commitment underwriting is for no less than
$20,000,000 net of underwriting discounts and commissions and such underwriting
reflects m-Wise a pre-money valuation of no less than $60 million.
SELLING STOCKHOLDERS
The shares of our common stock being offered by the selling
stockholders will be offered initially at $1.00 per share, until the common
stock is admitted for trading, at which point the shares will likely be offered
at market prices, as reflected on the National Association of Securities Dealers
OTC Bulletin Board, or on the NASDAQ Small Cap Market if the common stock is
then traded on NASDAQ. Selling stockholders may also sell their shares in
private transactions at negotiated prices. It is anticipated that registered
broker-dealers will be allowed the commissions which are usual and customary in
open market transactions. There are no other arrangements or understandings with
respect to the distribution of the common stock. The relationship, if any,
between us and any selling stockholder is set forth below. The selling
stockholders include officers, directors, employees, investors and certain of
our service providers and service providers of our subsidiaries. None of the
selling stockholders are broker-dealers or affiliates of broker-dealers.
Shares Beneficially Percentage
Owned Total Shares
Name and Address and Being Offered After Offering
---------------- ----------------- --------------
To be determined and disclosed via pre-effective amendment 8,595,632
32
PLAN OF DISTRIBUTION
We have applied to have our shares of common stock registered on the
OTC Bulletin Board. We anticipate that once the shares are trading on the OTC
Bulletin Board or any other market the selling stockholders will sell their
shares directly into any such market. Selling Stockholders will initially offer
their shares at $1.00 per share until such time as the common stock is quoted on
the OTC Bulletin Board, at which time, prices the selling stockholders will
receive will be determined by prevailing market prices on the OTC Bulletin Board
or Selling stockholders may also sell in private transactions at negotiated
prices. We cannot predict the price at which shares may be sold or whether the
common stock will ever trade on any market. The shares may be sold by the
selling stockholders, as the case may be, from time to time, in one or more
transactions. We do not intend to enter into any arrangements with any
securities dealers concerning solicitation of offers to purchase the shares.
Commissions and discounts paid in connection with the sale of the
shares by the selling stockholders will be determined through negotiations
between them and the broker-dealers through or to which the securities are to be
sold and may vary, depending on the broker-dealers fee schedule, the size of the
transaction and other factors. The separate costs of the selling stockholders
will be borne by them. The selling stockholders will, and any broker-broker
dealer or agent that participates with the selling stockholders in the sale of
the shares by them may, be deemed an "underwriter" within the meaning of the
Securities Act, and any commissions or discounts received by them and any
profits on the resale of shares purchased by them may be deemed to be
underwriting commissions under the Securities Act.
We will bear all costs of the offering in registering the shares but
will bear no selling expense costs. The costs of the offering are estimated at
$9,000. We will use our best efforts to update the registration statement and
maintain its effectiveness for a period of one year from its initial effective
date.
CERTAIN TRANSACTIONS
Research and Development Services Agreements, License Agreements and
Loan Agreement. We have entered into a License Agreement with each of our United
Kingdom, France, Spain, Italy and Israeli subsidiaries, and into Research and
Development Services Agreements with the Israeli subsidiary, m-Wise Ltd. The
License Agreements provide for the grant of a non-exclusive, irrevocable and
non-transferable license to each of the said subsidiaries to use, sublicense,
sell, market and distribute our technology and platform, for no consideration.
As part of our reorganization process and of our sales channels, these
agreements were terminated by us as of April 1, 2003. The Research and
Development Services Agreements with our Israeli subsidiary provide for the
performance of research and development services of the components to be
included in our technology and platform, by our Israeli subsidiary. During 2000,
in consideration for the services, we paid our Israeli subsidiary service fees
in an amount equal to the sum of all costs of the subsidiary, plus a fee equal
to 5% of such costs (a "cost plus" basis), or $473,883. As of 2001, we paid our
Israeli subsidiary service fees on a "cost" basis, however the parties may
change the consideration from time to time, and when we become profitable, the
consideration shall be on a "cost plus" basis, or another structure agreed by
the parties. The Research and Development Services and License agreements
provide for the sole ownership by us of our technology, platform, derivative
invention and intellectual property. The amounts paid in during the years ended
December 31, 2001 and 2002 to our Israeli subsidiary were $1,522,000 and
$1,760,000, respectively.
33
The Loan Agreement with the United Kingdom subsidiary and its
subsidiaries provides for the extension by us of a loan in the amount of
$3,200,000 to the United-Kingdom subsidiary, which was made by us between April
2000 and January 2003. The outstanding loan amount, together with simple
interest at a rate per annum of 4% shall be due and payable on the earlier of:
(i) August 31, 2006, or (ii) upon the occurrence of (A) any of the following
"exit events": (i) a consolidation, merger or reorganization of the subsidiary
with or into, or the sale of all or substantially all of the subsidiary's
assets, or substantially all of the subsidiary's issued and outstanding share
capital to any other company, or any other person, other than a wholly-owned
subsidiary of the subsidiary, or (ii) any transaction or series of related
transactions in which more than fifty percent (50%) of the outstanding share
capital of the subsidiary following such transaction or series of related
transactions is held by a shareholder or group of shareholders that held less
than fifty percent (50%) of the outstanding share capital of the subsidiary
prior to such transaction or series of transactions; or (B) (i) the insolvency
of the subsidiary; (ii) the commission of any act of bankruptcy by the
subsidiary; (iii) the execution by the subsidiary of a general assignment for
the benefit of creditors; (iv) the filing by or against the subsidiary of any
petition in bankruptcy or any petition for relief under the provisions of any
law for the relief of debtors, and the continuation of such petition without
dismissal for a period of ninety (90) days or more; (v) the appointment of a
receiver or trustee to take possession of a material portion of the property or
assets of the subsidiary and the continuation of such appointment without
dismissal for a period of ninety (90) days or more; or (vi) the subsidiary
ceases to conduct business in the normal course for a period of ninety (90) days
or more. The loans extended by the UK subsidiary to its subsidiaries were to be
repaid on the same terms and in the same manner as provided for with respects to
the loan extended us.
The operations of our subsidiaries, except for our Israeli subsidiary,
have been terminated. We do not expect the repayment of the loan amount. Because
the subsidiaries are wholly owned by us, their financial statements are
consolidated with our financial statements and the loans are eliminated as
intercompany transactions. The subsidiaries have no ability to pay creditors,
government institutions or to continue as a going concern.
The loan in the amount of $3,200,000 to our UK subsidiary was used by
our subsidiary primarily for: the establishment of its subsidiaries, salaries of
employees, network costs, office rent and for working capital and general
corporate purposes of the subsidiaries.
Due to the high costs and low revenues in the European application
service provider (ASP) market, in 2002 our management decided to transition our
focus away from pan-European wireless application service providers, and toward
installing and licensing our middleware technology at cellular operators and
wireless application service providers worldwide, and to operate through
original equipment manufacturers and regional sales representatives to sell our
products. Therefore, our management decided to liquidate, or allow the
liquidation of the UK subsidiary, m-Wise Ltd., and its three subsidiaries in
Italy, France and Spain, by creditors and local legal authorities. These
subsidiary companies have effectively ceased conducting business, and the
liquidation process is expected to take place within the next few months. The
only remaining assets in the subsidiaries are fixed assets, which are comprised
mainly of computer equipment.
34
Promissory Note dated July 10, 2002 (canceling and replacing certain
Promissory Notes dated March 13, 2002) with each of Syntek Capital AG and DEP
Technology Holdings Ltd. During 2002, Syntek Capital and DEP, then the sole
holders of shares of our Series B preferred stock and represented on our Board
of Directors, extended to us a loan in the aggregate amount of $1,800,000.
Pursuant to the Promissory Notes, we are required to repay the loan amount,
together with accrued interest from the date of the Promissory Notes and until
the date of repayment, during the period of January 1, 2003 through December 31,
2007. The interest rate is determined according to the per annum LIBOR rate
offered by Citibank North America as of the date of the Promissory Notes, and
thereafter such LIBOR rate offered on each anniversary of the date of the
Promissory Notes, to apply for the following 12 month period. The repayment of
the loan amount, together with the accrued interest thereon, is to be made
exclusively from our annual revenues generated during the repayment period, as
recorded in our audited annual financial statements in such way that each of the
Syntek Capital and DEP Technology Holdings shall be entitled to receive 2.5% of
the revenues on account of the repayment of the loan amount until the earlier to
occur of: (i) each of Syntek Capital and DEP Technology Holdings has been repaid
the entire loan amounts; or (ii) any event in which the loan amount becomes due
and payable, as described below. Actual payments are on a quarterly basis,
within 45 days following the last day of the quarter, based upon the quarterly
financial reports. The entire unpaid portion of the loan amount shall be
automatically and immediately due and payable upon the earlier to occur of (i)
December 31, 2007; (ii) the closing of an exit transaction; or (iii) an event of
default. An "exit transaction" includes, inter alia: (a) the acquisition of
m-Wise by means of merger, acquisition or other form of corporate reorganization
in which our stockholders prior to such transaction hold less than 50% of the
share capital of the surviving entity, (b) sale of all or substantially all of
our assets or any other transaction resulting in our assets being converted into
securities of any other entity, (c) the acquisition of all or substantially all
of our issued shares, (d) the sale or exclusive license of our intellectual
property other than in the ordinary course of business; or (e) a public offering
of our equity securities. An "event of default" includes, inter alia: (a) our
breach of any of our material obligations under the Promissory Notes (including
any default on any payment due under the Promissory Notes) which has not been
remedied within 20 days of written notice by Syntek Capital and DEP Technology
Holdings (b) the suspension of the transaction of our usual business or our
insolvency, (c) the commencement by us of any voluntary proceedings under any
bankruptcy reorganization, arrangement, insolvency, readjustment of debt,
receivership, dissolution or liquidation law or statute of a jurisdiction, or if
we shall be adjudicated insolvent or bankrupt by a decree of a court of
competent jurisdiction; if we shall petition or apply for, acquiesce in, or
consent to, the appointment of any receiver or trustee of us or for all or any
part of our property or if we apply for an arrangement with our creditors or
participants; or if we shall make an assignment of our intellectual property for
the benefit of our creditors (other than in the ordinary course of business), or
if we shall admit in writing our inability to pay our debts as they mature or if
any of our intellectual property is purchased by or assigned to any one of our
founders (and/or affiliates thereof) under liquidation proceedings without the
prior written consent of Syntek Capital or DEP Technology Holdings, (d) or if
there shall be commenced against us any proceedings related to us under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
receivership, dissolution or liquidation law or statute of any jurisdiction, and
any such proceedings shall remain undismissed for a period of thirty (30) days,
or if by any act we indicate our consent to, approval of or acquiescence in, any
such proceeding; or if a receiver or trustee shall be appointed for us or for
all or a substantial part of our property, and any such receivership or
trusteeship shall remain undischarged for a period of thirty (30) days; or (e)
if there shall have been a material deterioration of our business, financial
condition or operations. Under the Promissory Notes, we undertook that until the
repayment of the loan amount: (i) we shall not create or suffer to create a
pledge, charge or other encumbrance over any or all of our assets except for
such pledge, charge or encumbrance in favor of a bank under the terms of a loan
or line of credit granted by a bank to us, provided that we gave prior notice to
Syntek Capital and DEP Technology Holdings with respect such pledge, charge or
encumbrance at least ten (10) days prior to its creation; (ii) we shall not
engage or permit any of our subsidiaries to engage in any business other than
the business engaged in by us at the date of the Promissory Notes and any
business substantially similar or related thereto (or incidental thereto); (iii)
we shall not declare or pay a dividend or make any distribution or payment on
account of our shares, except for the purpose of purchasing common stock of
m-Wise held by Ogen LLC as applicable under a certain undertaking of the
principals of Ogen LLC towards m-Wise; (iv) we shall deliver to Syntek Capital
and DEP Technology Holdings audited financial statements within 90 days of the
end of our fiscal year, accompanied by the report of a firm of independent
certified public accountants of recognized standing and unaudited quarterly
financial statements signed by our Chief Financial Officer within 30 (thirty)
days of the end of each quarter and we shall also deliver to Syntek Capital and
DEP Technology Holdings any information which we make generally available to our
stockholders or which Syntek Capital and DEP Technology Holdings may otherwise
reasonably require. As of June 30, 2003, we have to pay $13,794 of the loan
amount, based on 2.5% of our revenues subsequent to January 1, 2003, up to date
we haven't paid off any amount. Neither Syntek nor DEP Technology is represented
on our current Board of Directors and neither is affiliated with any of our
officers, directors or principal stockholders.
35
Agreement, Security Agreement, Escrow Agreement and Undertaking. In
July 2002, Proton Marketing Associates, LLC, Putchkon.com, LLC (each a founding
stockholder of m-Wise and represented on our Board of Directors) and
Inter-Content Development for the Internet Ltd. (the "Buying stockholders")
purchased all of our Series B preferred stock then held by DEP Technology
Holdings Ltd. and Syntek Capital AG, thus becoming the sole holders of our
Series B preferred stock, except for options granted to purchase Series B
preferred stock. In consideration for the stock purchased, each of the Buying
stockholders is required to pay each of DEP Technology Holdings and Syntek
Capital, upon the consummation of any "liquidation event" (as described below),
an amount equal to 50% (to be reduced by 5 percentage points at the end of each
6 months commencing as of July 1, 2002, provided that from and after June 30,
2005, such percentage shall equal 20%) of any gross distribution to or any gross
proceeds received by the Buying stockholders by reason of their ownership of, or
rights in, any of our shares or options to purchase our shares, whether such
shares are held by the Buying stockholders directly, indirectly, or by an
affiliate (the "Founders securities"). The consideration will be paid upon the
consummation of a liquidation event which is defined as the: (i) sale, transfer,
conveyance, pledge or other disposal by the Buying stockholders or any affiliate
thereof of any of their Founders securities; (ii) any event in which the Buying
stockholders or any affiliate thereof receive stock (in kind or cash dividends)
from us or any surviving corporation following the consummation of a merger and
acquisition transaction (any transaction in which we shall merge into or
consolidate with any other corporation in which we are not the surviving
entity); or (iii) the initial public offering of our securities. In the event of
an initial public offering of our securities, the consideration shall be paid in
Founders securities and shall equal 50% (as adjusted) of the securities held by
the Buying stockholders prior to the public offering. Until payment of the
consideration as aforesaid, the purchased Series B preferred stock and any
securities as shall be issued and/or granted to either of the Buying
stockholders during the terms of the Agreement (the "Secured collateral"), are
subject to a certain first priority interest granted in favor of each of DEP
Technology Holdings and Syntek Capital (and subject to adjustment as aforesaid)
pursuant to a Security Agreement signed between the parties, and are placed in
escrow pursuant to a certain Escrow Agreement until the occurrence of a
liquidation event, such as the sale, transfer, conveyance, pledge or other
disposal by the Buying stockholders of any of their securities in m-Wise or the
consummation of an initial public offering of our securities. Under the Security
Agreement, the Buying stockholders undertook, inter alia, not to encumber or
pledge or to suffer any such encumbrance, pledge, attachment or other third
party rights on any of the Secured collateral. In an event of default in any
transfer of the consideration pursuant to the Agreement, DEP Technology Holdings
and Syntek Capitals shall have all rights of a secured creditor subject to the
terms of the Agreement and may immediately take ownership of any part of the
Secured collateral and sell, assign or transfer any part of the Secured
collateral. Under a Letter of Consent, Approval and Undertaking, each beneficial
owner of Proton Marketing Associates, Putchkon.com and Inter-Content Development
for the Internet undertook towards DEP Technology Holdings and Syntek Capital,
inter alia, not to transfer any securities and that such transfer shall be null
and void unless approved in writing by DEP Technology Holdings and Syntek
Capital.
36
DESCRIPTION OF SECURITIES
Common stock
Our Certificate of Incorporation authorizes the issuance of 210,000,000
shares of common stock, $.01 par value per share, of which 5,174,554 shares were
issued and outstanding as of the date of this prospectus. Holders of shares of
common stock are entitled to one vote for each share on all matters to be voted
on by the stockholders. Holders of shares of common stock have no cumulative
voting rights. Holders of shares of common stock are entitled to share ratably
in dividends, if any, as may be declared, from time to time by the Board of
Directors in its discretion, from funds legally available therefore and subject
to any preferential rights conferred to the holders of preferred stock. In the
event of a liquidation, dissolution or winding up of m-Wise, the holders of
shares of common stock are entitled to share pro rata with the holders of shares
of preferred stock all assets remaining after payment in full of all liabilities
and the liquidation preference to holders of preferred stock. Each of our
stockholders are granted a preemptive right to purchase our common stock. There
are no conversion rights, redemption or sinking fund provisions with respect to
the common stock.
Meetings of stockholders may be called by the Board of Directors.
Holders of a majority of the shares outstanding and entitled to vote at the
meeting must be present, in person or by proxy, for a quorum to be present to
enable the conduct of business at the meeting.
Preferred stock
Our Certificate of Incorporation authorizes the issuance of 170,000,000
shares of preferred stock, $.01 par value, including 325,000 authorized shares
of Series A preferred stock of which 268,382 shares of Series A preferred stock
were issued and outstanding as of the date of this prospectus, 3,000,000
authorized shares of Series B preferred stock of which 489,456 shares of Series
B preferred stock were issued and outstanding as of the date of this prospectus,
and 20,000,000 authorized shares of Series C preferred stock of which 6,315,258
shares of Series C preferred stock were issued and outstanding as of the date of
this prospectus.
Series A Preferred Stock
Holders of Series A preferred stock have no special dividend rights.
After payment of the preferential payments to holders of Series B and C
preferred stock, holders of Series A preferred stock shall be entitled to share
pro rata with the holders of Series B and C preferred stock and holders of
common stock the m-Wise assets upon liquidation based on the number of shares of
common stock into which the Series A, B and C preferred stock are then
convertible. Each share of Series A preferred stock is convertible into one
share of common stock, following adjustment upon the occurrence of certain
events, including in the event we issues shares of common stock at a price less
than $4.45 per share, excluding, inter alia, shares issued upon conversion of
Series A, B or C preferred stock, dividends or distributions thereon, employee,
director, consultants, subcontractors or officer stock options under the Plans,
and a warrant dated April 26, 2000 to purchase shares of Series A preferred
stock. The current holders of Series A preferred stock waived their right to
anti-dilution right pursuant to our Certificate of Incorporation.
The holders of Series A preferred stock have such number of votes per
share as if their shares were then converted into common stock at the then
applicable conversion rate. In addition, they have the right, voting as a class,
to elect one member of the Board of Directors. In addition, so long as at least
7% of the outstanding common shares (on an as-converted basis) are represented
by the Series A preferred stock, the consent of no less than 50% of the holders
of Series A preferred stock or, if applicable, the director nominated by the
Series A preferred stock, shall be required to approve, inter alia, a material
change in the nature of character of our business, the creation of a class of
securities with rights superior to the Series A preferred stock, or any
dissolution, liquidation or winding up of our business. Holders of Series A
preferred stock have no special redemption rights.
37
Series B and Series C Preferred Stock
Holders of Series B and Series C preferred stock have similar but not
identical rights. They have the right to non-cumulative dividends, when and if
declared by the Board of Directors, prior to payments of dividends to the
holders of common stock or Series A preferred stock, at the rate of 10% of their
original sale price (effectively $8.17 per share for the Series B preferred
stock and $.0048 per share for the Series C preferred stock).
Holders of Series B and Series C preferred stock have a liquidation
preference over holders of common stock and Series A preferred stock at the rate
of three times their original sale price, subject to certain adjustments (in
effect $24.51 per share of Series B preferred stock and $.144 per share of
Series C preferred stock). In the event the assets of m-Wise are insufficient to
pay both classes of Series B and Series C preferred stock, such assets shall be
distributed first to holders of Series C preferred stock and then to holders of
Series B preferred stock.
Holders of Series B common stock voting as a class have the right to
elect one member of the Board of Directors. Holders of Series C common stock
have the right to elect two members of the Board of Directors. Otherwise,
holders of Series B and Series C preferred stock have the right to vote as a
class with the holders of common stock and Series A preferred stock, as if such
holder had converted its shares of Series B or C preferred stock into common
stock. As of March 31, 2003, each shares of the Series B preferred stock was
convertible into 6.382 shares of common stock and each share of Series C
preferred stock was convertible into 1 share of common stock. Each share of
Series B and C preferred stock is convertible into 1 share of common stock,
subject to adjustment upon the occurrence of certain events, including in the
event we issue shares of common stock at a price less than $8.17 per share of
Series B and $.0048 for the Series C, excluding, inter alia, shares issued upon
conversion of Series A, B or C preferred stock, dividends or distributions
thereon, employee, director, consultants, subcontractors or officer stock
options under the Plans, and a warrant dated April 26, 2000 to purchase shares
of Series A preferred stock.
Automatic Conversion
Pursuant to our Certificate of Incorporation, Series A, B and C
preferred stock are automatically converted into common stock upon the date
specified by written consent of holders of a majority of Series B preferred
stock, or upon the sale of common stock in a firm commitment underwriting under
the Securities Act of 1933 or on the London stock Exchange, Paris stock Exchange
or the Frankfurt stock Exchange, which offering reflects a pre-offering
valuation of at least $50 million. The offering made by this prospectus does not
cause a mandatory conversion of the preferred stock.
Rights of First Refusal and Pre-Emption
The current holders of our common stock and preferred stock have the
right of first refusal for a period of twenty (20) days after notice thereof to
purchase any securities offered by us. The right of first refusal does not
extend to securities issuable upon conversion of existing preferred stock, upon
the exercise of existing options, or upon the conversion of outstanding loans,
upon the acquisition of another company provided we control 51% or more of such
acquired entity, in a firm commitment underwritten public offering of $7.5
million or more and in certain other circumstances.
The Holders of our Series C preferred stock who own more than 5% of the
issued and outstanding share capital have the right of first refusal for 15 days
after notice to purchase any shares offered by any of our stockholders, pursuant
to our Certificate of Incorporation. The holders of Series A, Series B and
Series C preferred stock have certain rights of first refusal to purchase shares
offered by m-Wise stockholders pursuant to a certain Stockholders Agreement
dated January 11, 2001.
38
Certain Events Deemed a Liquidation (Certain Changes of Control)
In the event we merge or sell substantially all of our assets in a
transaction in which 50% or more of our voting power is disposed of or
transferred, such event will be deemed a "liquidation" of m-Wise. However, if
such circumstance occur prior to June 16, 2003, then the liquidation preferences
of the preferred stock are different than as explained above in that (i) Series
A preferred holders shall be entitled to receive 40% of their original purchase
price, after Series B and C holders have received one-third of their
preferential amount, (ii) thereafter our management shall receive such amount as
resolved by the Board of Directors, then (ii) the Series A preferred holders
shall receive an additional 30% of their original purchase price, after payments
of the preference amounts to Holders of Series B and C preferred stock. Although
we know of no person seeking to obtain control of us at this time, this
provision has the effect of discouraging takeovers of our company and could have
an effect on the value of our common stock in any trading market which may exist
in the future.
Our Board of Directors has authority, without action by the
stockholders, to issue all or any portion of the authorized but unissued
146,675,000 shares of preferred stock in one or more series and to determine the
voting rights, preferences as to dividends and liquidation, conversion rights,
and other rights of such series, subject to certain restricting provisions
requiring the approval of the directors appointed by the Series A, Series B or
Series C preferred stock. We consider it desirable to have preferred stock
available to is to provide increased flexibility in structuring possible future
acquisitions and financings, and in meeting corporate needs which may arise. If
opportunities arise that would make desirable the issuance of preferred stock
through either a public offering or private placements, the provisions for
preferred stock in our Certificate of Incorporation would avoid the possible
delay and expense of a stockholders' meeting, except as may be required by law
or regulatory authorities. Issuance of the preferred stock could result,
however, in a series of securities outstanding that will have certain
preferences with respect to dividends and liquidation over the common stock,
which would result in dilution of the income per share and net book value of the
common stock. Issuance of additional common stock pursuant to any conversion
right that may be attached to the terms of any series of preferred stock may
also result in dilution of the net income per share and the net book value of
the common stock. The specific terms of any series of preferred stock will
depend primarily on market conditions, terms of a proposed acquisition or
financing, and other factors existing at the time of issuance. Therefore, it is
not possible at this time to determine in what respect a particular series of
preferred stock will be superior to our common stock or any other series of
preferred stock which we may issue. The Board of Directors may issue additional
preferred stock in future financings, but has no current plans to do so at this
time.
The issuance of preferred stock could have the effect of making it more
difficult for a third party to acquire a majority of our outstanding voting
stock.
We intend to furnish holders of our common stock annual reports
containing audited financial statements and to make public quarterly reports
containing unaudited financial information.
Transfer Agent
The transfer agent for our common stock is Colonial Stock Transfer
Corporation, 66 Exchange Place, Salt Lake City, Utah 84111, and its telephone
number is (801) 355-5740.
INTEREST OF NAMED EXPERTS AND COUNSEL
The legality of the common stock offered by this prospectus and certain
legal matters in connection with the offering will be passed upon for us by
Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP, New York, New York.
39
EXPERTS
Our audited financial statements included in this Prospectus as of
December 31, 2002 and 2001 have been audited by SF Partnership LLP, independent
certified public accountants, to the extent and for the periods set forth in
their report thereon, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement under the Securities Act with
respect to the securities offered hereby with the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. This prospectus, which is a part of the
registration statement, does not contain all of the information contained in the
registration statement and the exhibits and schedules thereto, certain items of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to us and our securities
offered, reference is made to the registration statement, including all exhibits
and schedules thereto, which may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates during regular business hours.
Statements contained in this prospectus as to the contents of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or document filed as an exhibit to the
registration statement, each such statement being qualified in its entirety by
such reference. We will provide, without charge upon oral or written request of
any person, a copy of any information incorporated by reference herein. This
request should be directed to m-Wise at 10 Hasadnaot Street, Herzeliya Pituach,
Israel 46728, telephone +972-9- 9581711.
We are required to file reports and other information with the
Commission. All of such reports and other information may be inspected and
copied at the Commission's public reference facilities described above. The
public may obtain information on the operation of the public reference room in
Washington , D.C. by calling the Commission at 1-800-SEC-0330. The Commission
maintains a web site that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the
Commission. The address of such site is http://www.sec.gov. In addition, we
intend to make available to our shareholders annual reports, including audited
financial statements and such other reports as we may determine.
INDEMNIFICATION
We have adopted provisions in its certificate of incorporation and
bylaws that limit the liability of our directors and provide for indemnification
of our directors and officers to the full extent permitted under the Delaware
General Corporation Law ("DGCL"). Under our certificate of incorporation, and as
permitted under the Delaware General Business Act, directors are not liable to
us or our stockholders for monetary damages arising from a breach of their
fiduciary duty of care as directors. Such provisions do not, however, relieve
liability for breach of a director's duty of loyalty to us or our stockholders,
liability for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law, liability for transactions in which the
director derived as improper personal benefit or liability for the payment of a
dividend in violation of Delaware law. Further, the provisions do not relieve a
director's liability for violation of, or otherwise relieve us or our directors
from the necessity of complying with federal or state securities laws or affect
the availability of equitable remedies such as injunctive relief or recission.
At present, there is no pending litigation or proceeding involving any
of our directors, officers, employees or agents where indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that may result in a claim for indemnification by any director or
officer.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to our directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
40
In the event that a claim for indemnification against such liabilities
(other than the payment by m-Wise of expenses incurred or paid by a director,
officer or controlling person of m-Wise in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
41
m-Wise, Inc.
CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2003 AND 2002
CONTENTS
Consolidated Balance Sheet F-1
Consolidated Statement of Deficit F-2
Consolidated Statement of Operations F-3 - F-4
Consolidated Statement of Changes in Stockholders' Equity F-5
Schedule of Expenses F-6 - F-7
Consolidated Statement of Cash Flows F-8
Notes to Consolidated Financial Statements F-9 - F-13
m-Wise, Inc.
Balance Sheet
June 30, 2003 and 2002
2003 2002
ASSETS
Current
Cash and cash equivalents $ 38,162 $ 25,564
Accounts receivable and other current assets 168,527 487,012
Prepaid and sundry assets 162,714 190,974
-------------------------------------
369,403 703,550
Long-term Prepaid Expenses 3,540 14,211
Property and Equipment - net of accumulated depreciation 392,594 566,609
-------------------------------------
$ 765,537 $ 1,284,370
=====================================
LIABILITIES
Current
Bank indebtedness $ 19,827 $ -
Trade accounts payable 1,217,224 739,846
Other payables and accrued liabilities 551,671 224,900
-------------------------------------
1,788,722 964,746
Accrued Severance Pay 23,767 22,151
Notes Payable 1,807,988 1,600,000
-------------------------------------
3,620,477 2,586,897
-------------------------------------
STOCKHOLDERS' DEFICIENCY
Capital Stock (note 4) $ 113,530 $ 7,579
Paid in Capital 5,659,057 5,301,726
Accumulated Other Comprehensive Loss (116,248) (14,665)
Accumulated Deficit (8,511,279) (6,597,167)
-------------------------------------
(2,854,940) (1,302,527)
-------------------------------------
$ 765,537 $ 1,284,370
=====================================
F-1
m-Wise, Inc.
Consolidated Statement of Deficit
Six Months Ended June 30, 2003 and 2002
2003 2002
Deficit - beginning of period $ (7,471,687) $ (5,215,699)
Net loss (1,039,592) (1,381,468)
-------------------------------------
Deficit - end of period $ (8,511,279) $ (6,597,167)
=====================================
F-2
m-Wise, Inc.
Consolidated Statement of Operations
Three Months Ended June 30, 2003 and 2002
2003 2002
Sales $ 83,553 $ 238,962
-------------------------------------
Expenses
General and administrative (page 6) 400,995 467,956
Research and development (page 6) 108,485 376,964
Financial 21,408 2,386
-------------------------------------
530,888 847,306
-------------------------------------
Net Loss $ (447,335) $ (608,344)
=====================================
Basic Loss Per Share $ (0.09) (0.69)
=====================================
Fully Diluted Loss Per Share $ (0.09) (0.69)
=====================================
Basic Weighted Average Number of Shares 5,174,554 876,738
=====================================
F-3
m-Wise, Inc.
Consolidated Statement of Operations
Six Months Ended June 30, 2003 and 2002
2003 2002
Sales $ 275,877 $ 452,990
-------------------------------------
Expenses
General and administrative (page 7) 941,593 1,043,939
Research and development (page 7) 348,336 786,034
Financial 25,540 4,485
-------------------------------------
1,315,469 1,834,458
-------------------------------------
Net Loss $ (1,039,592) $ (1,381,468)
=====================================
Basic Loss Per Share $ (0.23) (1.58)
=====================================
Fully Diluted Loss Per Share $ (0.23) (1.58)
=====================================
Basic Weighted Average Number of Shares 4,458,252 876,738
=====================================
F-4
m-Wise, Inc.
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 2003 and 2002
Common Shares Preferred Shares Accumulated
Number of Number of Comprehensive Paid in Accumulated
$ $ Loss Capital Deficit .
------------------------------------------------------------------------------------------
Balance, January 1, 2002 876,738 1 757,838 7,578 (14,665) $5,301,726 $(5,215,699)
Net Loss - - - - - - (1,381,468)
------------------------------------------------------------------------------------------
Balance, June 30, 2002 876,738 1 757,838 7,578 (14,665) $5,301,726 $(6,597,167)
==========================================================================================
Balance, January 1, 2003 876,738 1 757,838 7,578 (177,773) $5,301,726 $(7,471,687)
Net Loss - - - - - - (1,039,592)
Shares issued for
registration legal fees 4,297,816 42,798 - - - 207,202 -
Options vested for
employee services to
March 31 2003 - - - - - 345,250 -
180,441 warrants issued in
lieu of legal fees - - - - - 40,000 -
Class "C" shares issued for
obtaining line of
credit - - 6,315,258 63,153 - - -
Legal cost for registration - - - - - (250,000) -
Options vested for
employee services for the
quarter ended June 30 2003 - - - - - 14,879 -
Financial statement
translation - - - - 61,525 - -
------------------------------------------------------------------------------------------
Balance, June 30, 2003 5,174,554 42,799 7,073,096 70,731 (116,248) $5,659,057 $(8,511,279)
------------------------------------------------------------------------------------------
F-5
m-Wise, Inc.
Schedule of Expenses
Three Months Ended June 30, 2003 and 2002
2003 2002
General and Administrative
Professional services $ 210,564 $ 25,804
Consulting 65,141 11,663
Payroll and related expenses 42,981 79,507
Depreciation 42,328 30,252
Communications 18,051 49,797
Other expenses 11,548 20,820
Rent 6,108 35,188
Travel 4,074 44,523
Marketing 200 170,402
-------------------------------------
$ 400,995 $ 467,956
=====================================
Research and Development
Payroll and related expenses $ 96,093 $ 206,217
Depreciation 23,054 -
Materials and components 22,291 124,327
Vehicle maintenance 20,194 19,160
Travel 2,756 27,260
Government grant (55,903) -
-------------------------------------
$ 108,485 $ 376,964
=====================================
F-6
m-Wise, Inc.
Schedule of Expenses
Six Months Ended June 30, 2003 and 2002
2003 2002
General and Administrative
Payroll and related expenses $ 412,208 $ 155,625
Professional services 242,566 50,698
Consulting 133,587 26,011
Depreciation 82,525 63,188
Communications 43,325 95,808
Other expenses 24,811 64,192
Rent 13,700 94,950
Travel 8,332 105,536
Marketing (19,461) 387,931
-------------------------------------
$ 941,593 $ 1,043,939
=====================================
Research and Development
Payroll and related expenses $ 183,399 $ 440,569
Materials and components 102,863 247,208
Depreciation 47,207 -
Vehicle maintenance 41,608 46,398
Travel 29,162 51,859
Government grant (55,903) -
-------------------------------------
$ 348,336 $ 786,034
=====================================
F-7
m-Wise, Inc.
Consolidated Statement of Cash Flows
Six Months Ended June 30, 2003 and 2002
2003 2002
Cash Flows from Operating Activities
Net loss $ (1,039,592) $ (1,381,468)
Adjustments required to reconcile net loss to net cash used in
operating activities:
Depreciation 129,732 63,188
Issuance of securities for services 463,282 -
Accounts receivable and other current assets 63,795 (220,179)
Prepaid and sundry assets (75,905) (73,089)
Trade accounts payable 106,957 344,421
Other payables and accrued liabilities 105,489 (184,781)
Long-term prepaid expenses 13,478 4,410
Accrued severance pay 2,190 1,295
-------------------------------------
(230,574) (1,446,203)
-------------------------------------
Cash Flows from Investing Activities
Acquisition of capital assets (22,352) (222,666)
Foreign exchange on translation 61,525 -
-------------------------------------
39,173 (222,666)
-------------------------------------
Cash Flows from Financing Activities
Notes payable - 1,300,000
Bank indebtedness 13,988 (10,833)
-------------------------------------
13,988 1,289,167
-------------------------------------
Net Decrease in Cash and Cash Equivalents (177,413) (379,702)
Cash and Cash Equivalents - beginning of period 215,575 405,266
-------------------------------------
Cash and Cash Equivalents - end of period $ 38,162 $ 25,564
=====================================
F-8
m-Wise, Inc.
Notes to Financial Statements
June 30, 2003 and 2002
1. Description of Business
m-Wise Inc. (the "Company") is a U.S. corporation which develops interactive
messaging platforms for mobile phone-based commercial applications,
transactions and information services with Internet billing capabilities.
The Company has a wholly-owned subsidiary in Israel, which was incorporated
in 2000 under the laws of Israel and a wholly-owned subsidiary in England,
which was incorporated in 2000 under the laws of England.
The English company has wholly-owned subsidiaries in France, Italy and Spain,
which were incorporated under the laws of their respective countries.
2. Summary of Significant Accounting Policies
The accounting policies of the company are in accordance with U.S. generally
accepted accounting principles, and their basis of application is consistent
with that of the previous year. Outlined below are those policies considered
particularly significant:
a) Basis of presentation
These unaudited interim financial statements reflect all adjustments that
are, in the opinion of management, necessary to a fair statement of the
results for the interim periods presented.
b) Reporting currency
A majority of the Company's revenues are generated in U.S. dollars. In
addition, a substantial portion of the Company's costs are incurred in
U.S. dollars. Management has determined that the U.S. dollar will be used
as the Company's functional and reporting currency.
Accordingly, financial statements of subsidiaries maintained in currencies
other than the reporting currency are being translated into U.S. dollars
in accordance with Statement of Financial Accounting Standard No. 52 (SFAS
52), "Foreign Currency Translation". All translation gains and losses are
directly reflected separately in stockholders' equity as Accumulated Other
Comprehensive income or loss.
Foreign currency transactions of subsidiaries have been translated to
their functional currencies at the rate prevailing at the time of the
transaction. Realized foreign exchange gains and losses have been charged
to income in the year.
c) Cash and cash equivalents
Cash equivalents include cash and highly liquid investments with initial
maturities of three months or less.
F-9
m-Wise, Inc.
Notes to Financial Statements
June 30, 2003 and 2002
2. Summary of Significant Accounting Policies (cont'd)
d) Prepaid expenses
Prepaid expenses are amortized using the straight-line method over the
period during which such costs are recovered.
e) Property, Equipment and Depreciation
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is based on the estimated useful lives of the assets and is
provided using the undernoted annual rates and methods:
Furniture and equipment 6-15% Straight-line
Computer equipment 33% Straight-line
f) Revenue Recognition
The Company generates revenues from product sales, licensing, customer
services and technical support.
Revenues from products sales are recognized in accordance with Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements"
("SAB No. 101") when delivery has occurred provided there is persuasive
evidence of an agreement, the fee is fixed or determinable and collection
of the related receivable is probable.
Technology license revenues are recognized in accordance with SAB No. 101
at the time the technology and license is delivered to the customer,
collection is probable, the fee is fixed and determinable, a persuasive
evidence of an agreement exists, no significant obligation remains under
the sale or licensing agreement and no significant customer acceptance
requirements exist after delivery of the technology.
Revenues relating to customer services and technical support are
recognized as the services are rendered ratably over the period of the
related contract.
g) Research and Development Costs
Research and development costs are expensed as incurred.
F-10
m-Wise, Inc.
Notes to Financial Statements
June 30, 2003 and 2002
2. Summary of Significant Accounting Policies (cont'd)
h) Stock warrants and options
The company accounted for its stock options and warrants in accordance
with SFAS 123 "Accounting for Stock-Based Compensation" and SFAS 148
"Accounting for Stock-Based Compensation - Transition and Disclosure."
Value of options granted has been estimated by the Black Scholes option
pricing model.
i) Use of Estimates
The preparation of financial statements, in conformity with U.S. generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
j) Concentration of Credit Risk
SFAS No. 105, "Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentration of
Credit Risk", requires disclosure of any significant off-balance sheet
risk and credit risk concentration. The Company does not have significant
off-balance sheet risk or credit concentration. The Company maintains cash
and cash equivalents with major Israel financial institutions.
k) Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by
the Company using available market information and valuation
methodologies. Considerable judgment is required in estimating fair value.
Accordingly, the estimates may not be indicative of the amounts the
Company could realize in a current market exchange. At June 30, 2002 and
2003, the carrying amounts of cash equivalents, short-term bank deposits,
trade receivables and trade payables approximate their fair values due to
the short-term maturities of these instruments.
F-11
m-Wise, Inc.
Notes to Financial Statements
June 30, 2003 and 2002
2. Summary of Significant Accounting Policies (cont'd)
l) Impact of Recently Issued Accounting Standards
The FASB recently issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," that is applicable to financial statements
issued for fiscal years beginning after December 15, 2001. The FASB's new
rules on asset impairment supercede FASB Statement 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," and portions of APB Opinion 30, "Reporting the Results of
Operations." SFAS No. 144 provides a single accounting model for
long-lived assets to be disposed of and significantly changes the criteria
that must be met to classify an asset as "held-for-sale." Classification
as "held-for-sale" is an important distinction since such assets are not
depreciated and are stated at the lower of fair value and carrying amount.
SFAS No. 144 also requires expected future operating losses from
discontinued operations to be displayed in the period(s) in which the
losses are incurred, rather than as of the measurement date as currently
required. The provisions of SFAS No. 144 are not expected to have a
material effect on the company's financial position or operating results.
3. Severance Pay
The company accounts for its potential severance liability of its
Israel subsidiary in accordance with SFAS No. 43, "Accounting for
Compensated Absences". The Company's liability for severance pay is
calculated pursuant to applicable labour laws in Israel on the most
recent salary of the employees multiplied by the number of years of
employment as of the balance sheet date for all employees. The
Company's liability is fully accrued and reduced by monthly deposits
with severance pay funds and insurance policies.
The deposit funds include profits accumulated up to the balance sheet
date from the Israeli company. The deposited funds may be withdrawn
only upon the fulfillment of the obligation pursuant to Israeli
severance pay laws or labour agreements.
F-12
m-Wise, Inc.
Notes to Financial Statements
June 30, 2003 and 2002
4. Capital Stock
Authorized
210,000,000 Common shares
170,000,000 Preferred shares
Series "A": convertible, voting, par value of $0.01 per share
Series "B": 10% non-cumulative dividend, redeemable,
convertible, voting, par value of $0.01 per share
Series "C": 10% non-cumulative dividend, redeemable,
convertible, voting, par value of $0.01 per share
2003 2002
Issued
5,174,554 Common shares $ 42,799 $ 1
268,382 Series "A" Preferred shares 2,684 2,684
489,456 Series "B" Preferred shares 4,894 4,894
6,315,258 Series "C" Preferred shares 63,153 -
-------------------------------------
$ 113,530 $ 7,579
=====================================
F-13
m-Wise, Inc.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
CONTENTS
Independent Auditors' Report F-15
Consolidated Balance Sheet F-16
Consolidated Statement of Deficit F-17
Consolidated Statement of Operations F-18
Consolidated Statement of Changes in Stockholders' Equity F-19
Schedule of Expenses F-20
Consolidated Statement of Cash Flows F-21
Notes to Consolidated Financial Statements F-22 - F-32
F-14
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
m-Wise, Inc.
We have audited the accompanying balance sheets of m-Wise, Inc. (the
"Company") as of December 31, 2002 and 2001, and the related statements of
deficit, operations, change in stockholders' equity and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2002 and 2001, and the results of its operation, changes in its
accumulated deficit and its cash flows for the years ended, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from inception
and has negative cash flows from operations which raises substantial doubt about
its ability to continue as a going concern. Management's plan in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
"SF PARTNERSHIP, LLP"
Toronto, Canada CHARTERED ACCOUNTANTS
April 4, 2003
F-15
m-Wise, Inc.
Balance Sheet
December 31, 2002 and 2001
2002 2001
ASSETS
Current
Cash and cash equivalents $ 215,575 $ 405,266
Accounts receivable and other current assets (note 3) 232,322 266,833
Prepaid and sundry assets 86,809 117,885
------------ -----------
534,706 789,984
Long-term Prepaid Expenses (note 4) 17,018 18,621
Equipment (note 5) 499,974 407,131
------------ -----------
$ 1,051,698 $ 1,215,736
============ ===========
LIABILITIES
Current
Bank indebtedness $ 5,839 $ 10,833
Trade accounts payable 1,110,267 395,425
Other payables and accrued liabilities (note 6) 446,182 409,681
------------ -----------
1,562,288 815,939
Accrued Severance Pay (note 7) 21,577 20,856
Notes Payable (note 8) 1,807,988 300,000
------------ -----------
3,391,853 1,136,795
------------ -----------
STOCKHOLDERS' DEFICIENCY
Capital Stock (note 9) $ 7,579 $ 7,579
Paid in Capital 5,301,726 5,301,726
Accumulated Other Comprehensive Loss (177,773) (14,665)
Accumulated Deficit (7,471,687) (5,215,699)
------------ -----------
(2,340,155) 78,941
------------ -----------
$ 1,051,698 $ 1,215,736
============ ===========
F-16
m-Wise, Inc.
Consolidated Statement of Deficit
Years Ended December 31, 2002 and 2001
2002 2001
Deficit - beginning of year $ (5,215,699) $(1,172,786)
Net loss (2,255,988) (4,042,913)
------------ -----------
Deficit - end of year $ (7,471,687) $(5,215,699)
============ ===========
F-17
m-Wise, Inc.
Consolidated Statement of Operations
Years Ended December 31, 2002 and 2001
2002 2001
Sales $ 1,619,112 $ 585,894
------------ ------------
Expenses
General and administrative (page 6) 1,924,661 2,720,030
Research and development (page 6) 1,923,806 1,908,777
Financial 26,633 -
------------ ------------
3,875,100 4,628,807
------------ ------------
Net Loss $ (2,255,988) $(4,042,913)
============ ============
Basic Loss Per Share $ (2.57) (4.61)
============ ============
Fully Diluted Loss Per Share (note 9) $ (2.57) (4.61)
============ ============
Basic Weighted Average Number of Shares $ 876,738 $ 876,738
============ ============
F-18
m-Wise, Inc.
Consolidated Statement of Stockholders' Equity
Period from January 1, 2001 to December 31, 2002
Common Preferred Accumulated
Shares Shares Other Additional
Number of Number of Comprehensive Paid in Accumulated
Shares $ Shares $ Loss Capital Deficit
--------------------------------------------------------------------------------------
Balance, January 1, 2001 876,738 1 268,382 2,684 - $1,297,316 $(1,172,786)
Net Loss - - - - - - (4,042,913)
Options granted for employee
services - - - - - 9,000 -
Issuance of class "B"
Preferred shares - - 489,456 4,894 - 3,995,410 -
Financial statement
translation - - - - (14,665) - -
--------- ---- -------- ----- -------- ---------- ------------
Balance, December 31, 2001 876,738 1 757,838 7,578 (14,665) $5,301,726 $ (5,215,699)
========= ==== ======== ===== ======== ========== ============
Balance, January 1, 2002 876,738 1 757,838 7,578 (14,665) $5,301,726 $(5,215,699)
Net Loss - - - - - - (2,255,988)
Financial statement
translation - - - - (163,108) - -
--------- ---- -------- ----- -------- --------- ------------
Balance, December 31, 2002 876,738 1 757,838 7,578 (177,773) $5,301,726 $ (7,471,687)
========= ==== ======== ===== ======== ========== ============
F-19
m-Wise, Inc.
Schedule of Expenses
Years Ended December 31, 2002 and 2001
2002 2001
General and Administrative
Payroll and related expenses $ 476,283 $ 763,130
Consulting 381,248 596,797
Other expenses 242,195 138,103
Marketing 199,932 378,655
Rent 165,397 193,631
Professional services 145,629 277,312
Depreciation 132,992 79,994
Communications 113,359 167,897
Travel 67,626 124,511
----------- ----------
$ 1,924,661 $2,720,030
=========== ==========
Research and Development
Materials and components $ 879,775 $ 739,818
Payroll and related expenses 677,300 824,983
Travel 175,231 132,874
Vehicle maintenance 86,661 114,057
Depreciation 85,129 56,776
Shipment and freight 19,710 40,269
----------- ----------
$ 1,923,806 $1,908,777
=========== ==========
F-20
m-Wise, Inc.
Consolidated Statement of Cash Flows
Years Ended December 31, 2002 and 2001
2002 2001
Cash Flows from Operating Activities
Net loss $ (2,255,988) $(4,042,913)
Adjustments required to reconcile net loss to net cash used in operating
activities:
Depreciation 218,121 136,770
Wages and salaries paid by options - 9,000
Accounts receivable and other current assets 34,511 (183,689)
Prepaid and sundry assets 31,076 (117,885)
Trade accounts payable 714,842 182,551
Other payables and accrued liabilities 36,501 243,214
Long-term prepaid expenses 1,603 (12,153)
Accrued severance pay 721 20,856
------------ -----------
(1,218,613) (3,764,249)
------------ -----------
Cash Flows from Investing Activities
Acquisition of equipment (310,964) (281,653)
Foreign exchange on translation (164,056) (13,392)
------------ -----------
(475,020) (295,045)
------------ -----------
Cash Flows from Financing Activities
Issuance of common stock - 4,000,304
Increase in notes payable 1,807,988 300,000
Repayment of notes payable (300,000) -
Bank indebtedness - gross (4,994) 10,833
------------ -----------
1,502,994 4,311,137
------------ -----------
Foreign Exchange Gain (Loss) on Cash balances 948 (1,273)
------------ -----------
Net (Decrease) Increase in Cash and Cash Equivalents (189,691) 250,570
Cash and Cash Equivalents - beginning of year 405,266 154,696
------------ -----------
Cash and Cash Equivalents - end of year $ 215,575 $ 405,266
============ ===========
F-21
m-Wise, Inc.
Notes to Financial Statements
December 31, 2002 and 2001
1. Description of Business and Going Concern
a) Description of Business
m-Wise Inc. (the "Company") is a U.S. corporation which develops
interactive messaging platforms for mobile phone-based commercial
applications, transactions and information services with internet
billing capabilities.
The Company has a wholly-owned subsidiary in Israel, which was
incorporated in 2000 under the laws of Israel and a wholly-owned
subsidiary in England, which was incorporated in 2000 under the laws
of England.
The English company has wholly-owned subsidiaries in France, Italy
and Spain, which were incorporated under the laws of their
respective countries.
b) Going Concern
The Company's financial statements are presented on a going concern
basis, which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business. The Company has
experienced recurring losses since inception and has negative cash
flows from operations that raise substantial doubt as to its ability
to continue as a going concern. For the years ended December 31,
2002 and 2001, the Company experienced net losses of $2,255,988 and
$4,042,913 respectively.
The Company is in an industry where operational fluctuation is
usually higher than other ordinary industries. The accompanying
financial statements reflect management's current assessment of the
impact to date of the economic situation on the financial position
of the Company. Actual results may differ materially from
management's current assessment.
The Company's ability to continue as a going concern is also
contingent upon its ability to secure additional financing,
continuing sale of its products and attaining profitable operations.
Management is pursuing various sources of equity financing. Although
the Company plans to pursue additional financing, there can be no
assurance that the Company will be able to secure financing when
needed or obtain such on terms satisfactory to the Company, if at
all.
The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may
result from the possible inability of the Company to continue as a
going concern.
F-22
m-Wise, Inc.
Notes to Financial Statements
December 31, 2002 and 2001
2. Summary of Significant Accounting Policies
The accounting policies of the company are in accordance with U.S.
generally accepted accounting principles, and their basis of application
is consistent with that of the previous year. Outlined below are those
policies considered particularly significant:
a) Reporting currency
A majority of the Company's revenues are generated in U.S. dollars.
In addition, a substantial portion of the Company's costs are
incurred in U.S. dollars. Management has determined that the U.S.
dollar will be used as the Company's functional and reporting
currency.
Accordingly, financial statements of subsidiaries maintained in
currencies other than the reporting currency are being translated
into U.S. dollars in accordance with Statement of Financial
Accounting Standard No. 52 (SFAS 52), "Foreign Currency
Translation". All translation gains and losses are directly
reflected separately in stockholders' equity as Accumulated Other
Comprehensive Income or Loss.
Foreign currency transactions of subsidiaries have been translated
to their functional currencies at the rate prevailing at the time of
the transaction. Realized foreign exchange gains and losses have
been charged to income in the year.
b) Cash and cash equivalents
Cash equivalents include cash and highly liquid investments with
initial maturities of three months or less.
c) Prepaid expenses
Prepaid expenses are amortized using the straight-line method over
the period during which such costs are recovered.
d) Equipment and Depreciation
Equipment are stated at cost less accumulated depreciation.
Depreciation is based on the estimated useful lives of the assets
and is provided using the undernoted annual rates and methods:
Furniture and equipment 6-15% Straight-line
Computer equipment 33% Straight-line
F-23
m-Wise, Inc.
Notes to Financial Statements
December 31, 2002 and 2001
2. Summary of Significant Accounting Policies (cont'd)
e) Revenue Recognition
The Company generates revenues from product sales, licensing,
customer services and technical support.
Revenues from products sales are recognized in accordance with Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements" ("SAB No. 101") when delivery has occurred provided
there is persuasive evidence of an agreement, the fee is fixed or
determinable and collection of the related receivable is probable.
Technology license revenues are recognized in accordance with SAB
No. 101 at the time the technology and license is delivered to the
customer, collection is probable, the fee is fixed and determinable,
a persuasive evidence of an agreement exists, no significant
obligation remains under the sale or licensing agreement and no
significant customer acceptance requirements exist after delivery of
the technology.
Revenues relating to customer services and technical support are
recognized as the services are rendered ratably over the period of
the related contract.
f) Research and Development Costs
Research and development costs are expensed as incurred.
g) Use of Estimates
The preparation of financial statements, in conformity with U.S.
generally accepted accounting principles, requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
h) Concentration of Credit Risk
SFAS No. 105, "Disclosure of Information About Financial Instruments
with Off-Balance Sheet Risk and Financial Instruments with
Concentration of Credit Risk", requires disclosure of any
significant off-balance sheet risk and credit risk concentration.
The Company does not have significant off-balance sheet risk or
credit concentration. The Company maintains cash and cash
equivalents with major Israel financial institutions.
F-24
m-Wise, Inc.
Notes to Financial Statements
December 31, 2002 and 2001
2. Summary of Significant Accounting Policies (cont'd)
i) Fair Value of Financial Instruments
The estimated fair value of financial instruments has been
determined by the Company using available market information and
valuation methodologies. Considerable judgment is required in
estimating fair value. Accordingly, the estimates may not be
indicative of the amounts the Company could realize in a current
market exchange. At December 31, 2001 and 2002, the carrying amounts
of cash equivalents, short-term bank deposits, trade receivables and
trade payables approximate their fair values due to the short-term
maturities of these instruments.
j) Impact of Recently Issued Accounting Standards
The FASB recently issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," that is applicable to
financial statements issued for fiscal years beginning after
December 15, 2001. The FASB's new rules on asset impairment
supercede FASB Statement 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and
portions of APB Opinion 30, "Reporting the Results of Operations."
SFAS No. 144 provides a single accounting model for long-lived
assets to be disposed of and significantly changes the criteria that
must be met to classify an asset as "held-for-sale." Classification
as "held-for-sale" is an important distinction since such assets are
not depreciated and are stated at the lower of fair value and
carrying amount. SFAS No. 144 also requires expected future
operating losses from discontinued operations to be displayed in the
period(s) in which the losses are incurred, rather than as of the
measurement date as currently required. The provisions of SFAS No.
144 are not expected to have a material effect on the company's
financial position or operating results.
3. Accounts Receivable and other current assets
2002 2001
Trade debtors $ 127,868 $ 208,999
Value added taxes receivable 100,857 29,363
Accrued income 573 3,730
Other 3,024 24,741
---------- ---------
$ 232,322 $ 266,833
========== =========
F-25
m-Wise, Inc.
Notes to Financial Statements
December 31, 2002 and 2001
4. Long-term Prepaid Expenses
The long-term prepaid expenses consist of prepaid car lease payments
representing the last three months of the lease period ending in the year
2004.
5. Equipment
Equipment is comprised as follows:
2002 2001
Accumulated Accumulated
Cost Depreciation Cost Depreciation
--------- ------------- --------- ------------
Furniture and equipment $ 70,176 $ 22,510 $ 52,276 $ 16,087
Computer equipment 830,961 378,653 517,113 146,171
--------- -------- --------- ---------
$ 901,137 $401,163 $ 569,389 $ 162,258
--------- -------- --------- ---------
Net carrying amount $499,974 $ 407,131
-------- ---------
6. Other payables and accrued expenses
2002 2001
Employee payroll accruals $ 119,106 $ 88,950
Accrued payroll taxes 78,939 57,452
Accrued expenses 242,988 242,908
Others 5,149 20,371
--------- --------
$ 446,182 $409,681
========= ========
F-26
m-Wise, Inc.
Notes to Financial Statements
December 31, 2002 and 2001
7. Accrued Severance Pay
The company accounts for its potential severance liability of its Israel
subsidiary in accordance with SFAS No. 43, "Accounting for Compensated
Absences". The Company's liability for severance pay is calculated
pursuant to applicable labour laws in Israel on the most recent salary of
the employees multiplied by the number of years of employment as of the
balance sheet date for all employees. The Company's liability is fully
accrued and reduced by monthly deposits with severance pay funds and
insurance policies. As at December 31, 2001 and 2002, the amount of the
liabilities accrued were $38,468 and $49,842 respectively. Severance pay
expenses for the years ended December 31 2001 and 2002 were $20,856 and
$2,013.
The deposit funds include profits accumulated up to the balance sheet date
from the Israeli company. The deposited funds may be withdrawn only upon
the fulfillment of the obligation pursuant to Israeli severance pay laws
or labour agreements. Cash surrender values of the deposit funds as at
December 31, 2001 and 2002 were $17,612 and $28,265 respectively. Income
earned from the deposit funds were immaterial for 2001 and 2002.
The value of these policies is recorded as an asset in the Company's
balance sheet. Severance pay expenses for the years ended December 31,
2001 and 2002 were $20,856 and $2,013 respectively.
8. Notes Payable
2002 2001
Syntek Capital AG - a significant shareholder until July 2002 $ 900,000 $ 150,000
DEP Technology Holdings Ltd. - a significant shareholder
until July 2002 900,000 150,000
Accrued interest 7,988 -
---------- ----------
$1,807,988 $ 300,000
========== ==========
The promissory notes are unsecured, bear interest at the per annum LIBOR
rate offered by Citibank North America and are repayable on December 31,
2007. The annual principal repayments are calculated as 2.5% of annual
revenues. To date, no principal repayments have been made. These notes
replace the notes originally issue in 2001.
Under the loan agreements, the company is not allowed to declare dividends
except for the purpose of redemption of common stock owned by Ogen LLC,
one of the stockholders of the Company.
The Company may not create a pledge, charge or other encumbrance over any
or all of its assets for financing without the lenders' consent and must
provide notice to the lender at least 10 days prior to any such action.
F-27
m-Wise, Inc.
Notes to Financial Statements
December 31, 2002 and 2001
9. Capital Stock
Authorized
210,000,000 Common shares
170,000,000 Preferred shares
Series "A": convertible, voting, par value of $0.01 per share
Series "B": 10% non-cumulative dividend, redeemable, convertible,
voting, par value of $0.01 per share
Series "C": 10% non-cumulative dividend, redeemable,
convertible, voting, par value of $0.01 per share
2002 2001
Issued
876,738 Common shares $ 1 $ 1
268,382 Series "A" Preferred shares 2,684 2,684
489,456 Series "B" Preferred shares 4,894 4,894
-------- --------
$ 7,579 $ 7,579
======== ========
During the 2001 year, 489,456 Series "B" Preferred shares were issued for cash
consideration of $4,000,304.
Stock warrants and options:
The company accounted for its stock options and warrants in accordance
with SFAS 123 "Accounting for Stock - Based Compensation" and SFAS 148
"Accounting for Stock - Based compensation - Transition and Disclosure."
Value of options granted has been estimated by the Black Scholes option
pricing model.
In April 2000, 56,180 warrants were issued to one of the shareholders with
his preferred Class "A" shares for a total investment of $750,000.
Warrants have no expiry date and an exercise price for common stock of the
company at $4.45 per share. No value was assigned to the warrants and the
total investments net of par value of preferred Class "A" shares has been
presented as additional paid in capital.
In February 2001 the Board of Directors of the Company adopted two option
plans to allow employees and consultants to purchase ordinary shares of
the company.
The Israel 2001 share option plan granted 100,000 stock options for the
common stock of the company having a $0.01 nominal par value each and an
exercise price of $0.01. The International 2001 share option plan granted
50,000 stock options for the common stock having a $0.01 nominal par value
each and an exercise price of $0.01.
F-28
m-Wise, Inc.
Notes to Financial Statements
December 31, 2002 and 2001
9. Capital Stock (cont'd)
The options vest gradually over a period of 4 years from the date of grant
for Israel and 10 years (no less than 20% per year for five years for
options granted to employees) for the International plan. The term of each
option shall not be more than 8 years from the date of grant in Israel and
10 years from the date of grant in the International plan.
The stock options and the preferred shares have not been included in the
calculation of the diluted earnings per share as their inclusion would be
antidilutive.
The following table summarizes the stock option activity during 2002 and
2001:
2002 2001
Israel International Israel International
------ ------------- ------ -------------
Outstanding, beginning of year 50,000 100,000 - -
Granted - - 50,000 100,000
Exercised - - - -
Cancelled - - - -
------- ------- ------ -------
Outstanding, end of year 50,000 100,000 50,000 100,000
======= ======= ====== =======
10. Lease Commitments
The Company is committed to lease obligations, expiring December 2003.
Future minimum annual payments (exclusive of taxes, insurance and
maintenance costs) under these leases are as follows:
2003 $ 24,000
--------
F-29
m-Wise, Inc.
Notes to Financial Statements
December 31, 2002 and 2001
11. Income Taxes
The company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". This Standard prescribes the use of the
liability method whereby deferred tax asset and liability account balances
are determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
Under SFAS No. 109 income taxes are recognized for the following: a)
amount of tax payable for the current year, and b) deferred tax
liabilities and assets for future tax consequences of events that have
been recognized differently in the financial statements than for tax
purposes. Management determined that accounting values of its assets and
liabilities recorded are not materially different from their tax values
and therefore no deferred tax assets/liabilities have been setup to
account for the temporary differences.
The Israeli subsidiary maintains an investment program in hardware and
software in the amount of $75,000 and has been granted the status of
"Approved Enterprise" under the Law for the Encouragement of Capital
Investments, 1959 in Israel. This status entitles the Company to an
exemption from tax on income derived there from for a period of 10 years
starting in the year in which the Company first generates taxable income,
but not later than 14 years from the date of approval which was received
on December 2002 or 12 years from commencement of operations. The
tax-exempt profits that will be earned by the Company's "Approved
Enterprises" can be distributed to shareholders, without imposing tax
liability on the Company only upon its complete liquidation. If these
retained tax-exempt profits are distributed in a manner other than in the
complete liquidation of the Company they would be taxed at the corporate
tax rate applicable to such profits as if the Company had not elected the
alternative system of benefits (depending on the level of foreign
investment in the Company) currently between 10% to 25% for an "Approved
Enterprise". Under SFAS 109, a deferred tax liability normally would be
recorded relating to taxes that would be owed on the distribution of
profits even if management does not intend currently to declare dividends.
As at December 31, 2002, the Israel subsidiary has not reported any
taxable income and there was an accumulated deficit of approximately
$220,000. There was no deferred tax benefit nor liability to be recorded
in the year.
The company has accumulated tax losses in all of its subsidiaries. The
European subsidiaries will be liquidated as described in note 15(a). For
the United States and Israel subsidiaries, it is not more likely than not
that the company will be able to generate income to utilize the tax loss.
No deferred tax assets have been setup to record the tax benefits.
As at December 31, 2002, the company has approximately $4,200,000 and
$220,000 tax losses carried forward in its United States and Israeli
subsidiaries. Losses in the United States subsidiary, if not utilized,
will expire in twenty years from the year of origin, December 31, 2020 to
December 31, 2022. For the Israel subsidiary, the losses can be carried
forward indefinitely to reduce income taxes on future taxable income.
F-30
m-Wise, Inc.
Notes to Financial Statements
December 31, 2002 and 2001
12. Related Party Transactions
During the year the company made payments to its directors as follows:
2002 2001
Consulting fees and salaries $ 240,000 $ 514,497
========== =========
These transactions were in the normal course of business and recorded at
an exchange value established and agreed upon by the above mentioned
parties.
13. Major Customers
In 2001, the company had two major customers, primarily in Europe, which
accounted for 85% of the total revenue. In 2002, sales to another three
major customers accounted for 73% of the total revenue, of which 65% were
in the United Kingdom and 35% were in Asia.
14. Segmented Information
Israel U.K. France Italy Spain USA
Gross Revenue - 2002 28,928 291,018 25,203 250,916 - 1,023,047
2001 - 517,304 471 68,119 - -
Net income (loss) - 2002 (1,810,889) (551,423) (352,496) 84,261 (107,345) 481,906
2001 (1,690,396) (1,246,511) (171,643) (23,399) (34,677) (876,287)
Total assets - 2002 311,613 180,483 74,292 220,237 44,895 220,178
2001 324,649 376,990 59,070 116,484 37,440 301,103
Equipment (net) - 2002 184,336 88,519 18,117 176,578 32,424 -
2001 179,506 143,043 25,122 22,239 37,221 -
F-31
m-Wise, Inc.
Notes to Financial Statements
December 31, 2002 and 2001
15. Subsequent Events
a) Due to the high costs and low revenues in the European application
service provider (ASP) market, the Company's management has decided
to allow the liquidation of the English subsidiary, m-Wise Ltd., and
its three subsidiaries in Italy, France and Spain, by creditors and
local legal authorities. These subsidiary companies have effectively
ceased conducting business (m-Wise Italy's 2-year ASP contract with
Vodafone Omnitel expired in the end of March 2003), and the
liquidation process is expected to take place within the next fiscal
period. As a result, the trade accounts payable of the European
companies of about $900,000 are not expected to be paid due to
insufficient funds.
The company did not apply SFAS No. 144 "Accounting for the
impairment or disposal of long-lived assets" and SFAS No. 146
"Accounting for costs associated with exit or disposal activities"
when proceeds of the net assets and the settlement amounts of the
payable can not be reasonably determined.
b) In January 2003, the company issued 4,279,816 common shares for
$250,000 of legal services with regard to the registration of its
securities with the Securities Exchange Commission.
c) In January 2003, the Israel 2001 share option plan granted its
300,000 stock options for the common stock of the company. The
option has a $0.01 nominal par value each and an exercise price of
$0.01. The options have the same features as the option granted in
February 2001 as described in Note 9.
d) In January 2003, the Israel 2003 share option plan granted 419,247
stock options for the Class "B" preferred shares of the company
having a $0.01 nominal par value each and an exercise price of
$0.01. The International 2003 share option plan granted 654,390
stock options for the Class "B" preferred shares of m-Wise, Inc.
having a $0.01 nominal par value each and an exercise price of
$0.01. The options have the same features as the option granted in
February 2001 as described in Note 9.
e) In January 2003, the company issued 6,315,258 Class "C" preferred
shares, as described in Note 9, at par value to a shareholder, who
became a significant shareholder, in lieu of the financing fees for
the credit line facility of $300,000 offered by the shareholder.
f) In January 2003, the company issued 180,441 warrants with an
exercise price of $0.01 for common shares of the company in lieu of
legal services. The warrant has no expiry date.
g) In January of 2003, the company was awarded a joint Israeli
Singapore government grant with Hewlett Packard in the amount of
$186,343.
F-32
No dealer, salesman or other person is authorized to give any information or to
make any representations not contained in this Prospectus in connection with the
offer made hereby, and, if given or made, such information or representations
must not be relied upon as having been authorized by us. This Prospectus does
not constitute an offer to sell or a solicitation to an offer to buy the
securities offered hereby to any person in any state or other jurisdiction in
which such offer or solicitation would be unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information contained herein is correct as of any time
subsequent to the date hereof.
- -----------------------------------------------------
TABLE OF CONTENTS Page
----
Prospectus Summary.......................... 2
Risk Factors................................ 4
Additional Information...................... 5
Dividend Policy............................. 5
Market Price of common stock................ 6
Plan of Operation........................... 6
Business.................................... 7
Management.................................. 10
Principal stockholders...................... 14
Selling stockholders........................ 14
Plan of Distribution........................ 21
Certain Transactions........................ 21
Description of Securities................... 22
Interest of Named Experts and Counsel....... 23
Experts..................................... 23
Indemnification............................. 23
Financial Statements........................ F-1
- -----------------------------------------------------
Until ______, 2003 (25 days after the date of this prospectus) all dealers that
effect transactions in these securities, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
m-Wise, Inc.
SHARES
8,595,632
PROSPECTUS
, 2003
m-Wise, INC.
PART II
Item 24. Indemnification of Directors and Officers.
We have adopted provisions in its articles of incorporation and bylaws
that limit the liability of its directors and provide for indemnification of its
directors and officers to the full extent permitted under the Delaware General
Corporation Law. Under our articles of incorporation, and as permitted under the
Delaware General Corporation Law, directors are not liable to us or its
stockholders for monetary damages arising from a breach of their fiduciary duty
of care as directors. Such provisions do not, however, relieve liability for
breach of a director's duty of loyalty to us or its stockholders, liability for
acts or omissions not in good faith or involving intentional misconduct or
knowing violations of law, liability for transactions in which the director
derived as improper personal benefit or liability for the payment of a dividend
in violation of Delaware law. Further, the provisions do not relieve a
director's liability for violation of, or otherwise relieve us or our directors
from the necessity of complying with, federal or state securities laws or affect
the availability of equitable remedies such as injunctive relief or recission.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of us where indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that may result in a claim for indemnification by any director or
officer.
Item 25. Other Expenses of Issuance and Distribution. (all to be paid by m-Wise)
Filing fee under the Securities Act of 1933 $ 695.39
Printing and engraving(1) $ 300.00
Legal Fees $ 500.00
Blue Sky Fees $ 1,200.00
Auditors Fees(1) $ 6,000.00
NASD Filing Fees $ 500.00
Miscellaneous(1) $ 804.61
----------
TOTAL $ 9,000.00
(1) Estimates
Item 26. Recent Sales of Unregistered Securities.
Class of
Purchaser Date Stock Shares Price Total
- --------- ---- ----- ------ ----- -----
e-Street International, AG 01/09/01 Series B 244,728 $ 2,000,162
D.E.P. Technology
Holdings Ltd. 01/09/01 Series B 244,728 $ 2,000,162
Cap Ventures Ltd. 04/12/00 Series A 168,672 $ 750,000(1)
Cap Ventures Ltd. 09/04/00 Series A 56,180 $ 250,000
Cap Ventures Ltd. 11/15/00 Series A 43,530 $ 300,000
Proton Marketing
Associates, LLC 02/03/00 Common 332,640 $ 3,326.4
Proton Marketing
Associates, LLC 07/23/02 Series B 188,252(2)
Putchkon.com, LLC 02/03/00 Common 258,720 $ 2,587.2
Putchkon.com, LLC 07/23/02 Series B 188,252(3)
Chinese Whispers, LLC 02/03/00 Common 100,800 $ 1,008
Ogen, LLC 02/03/00 Common 147,840 $ 1,478.4
Doron Cohen 02/03/00 Common 10,695 $ 106.95
Irit Cohen 02/03/00 Common 10,695 $ 106.95
Yuval Horn 02/03/00 Common 15,348 $ 153.48
Inter-Content
Development
for the Internet Ltd. 07/23/02 Series B 112,952(4)
Miretzky Holdings
Limited (5) 01/25/03 Series C 6,315,258(5)
(1) Plus a warrant to purchase 56,180 shares of Series A preferred
stock, at an exercise price of $4.45 per share.
(2),(3),(4) In July 2002, certain stockholders of m-Wise purchased the
holdings of DEP Technology Holdings Ltd. and Syntek Capital AG
(formerly e-Street International, AG). The consideration shall
be paid upon the occurrence of certain events, from the
distribution received by the purchasing stockholders. See
"Certain Transactions".
(5) In January 2003, m-Wise issued in consideration for the
provision of a credit line in an amount of $300,000, 6,315,258
shares of Series C preferred stock to Miretzky Holdings
Limited.
No underwriter was involved in the above transactions. Each of the transactions
was exempt under section 4(2) of the Securities Act of 1933 as one not involving
any public solicitation public offering.
Item 27. Exhibits and Financial Schedules
3. Certificate of Incorporation and Bylaws
3.1. Amended and Restated Certificate of Incorporation(1)
3.2 Bylaws(1)
4. Instruments defining the rights of security holders
4.1 Purchase and registration rights agreement and schedule of
details.(1)
5.1 Opinion of Gersten, Savage, Kaplowitz, Wolf & Marcus.(2)
10. Material Contracts
10.1 Amended and Restated Employment Agreement with Mordechai
Broudo(1)
10.2 Amendment to Amended and Restated Employment Agreement with
Mordechai Broudo(1)
10.3 Amended and Restated Employment Agreement with Shay
Ben-Asulin(1)
10.4 Amendment to Amended and Restated Employment Agreement with
Shay Ben-Asulin(1)
10.5 Employment Agreement, Gabriel Kabazo(1)
10.6 Confidentiality rider to Gabriel Kabazo Employment
Agreement(1)
10.7 Employment Agreement Asaf Lewin(1)
10.8 2003 International Share Option Plan(1)
10.9 Form of Option Agreement, 2003 International Share Option
Plan(1)
10.10 2001 International Share Option Plan(1)
10.11 Form of Option Agreement, 2001 International Share Option
Plan(1)
10.12 2003 Israel Stock Option Plan(1)
10.13 Form of Option Agreement, 2003 Israel Stock Option Plan(1)
10.14 2001 Israel Share Option Plan(1)
10.15 Form of Option Agreement, 2001 Israel Share Option Plan(1)
10.16 Investors' Rights Agreement dated January 11, 2001
21. Subsidiaries of the small business issuer. We operate only one
subsidiary, which is incorporated in Israel. We operate under no other
tradenames.
23. Consents of Experts and Counsel
23.1 Consent of SF Partnership LLP(2)
23.2 Consent of Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP
included in Exhibit 5.1 hereto.(2)
All other Exhibits called for by Rule 601 of Regulation S-B are not
applicable to this filing.
(b) Financial Statement Schedules
All schedules are omitted because they are not applicable or because
the required information is included in the financial statements or notes
thereto.
(1) Previously filed.
(2) Filed herewith.
Item 28. Undertakings.
(a) The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which it offers or
sells securities, a post-effective amendment to this
registration statement to:
(I) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or
events which, individually or together represent a fundamental change in the
information in the registration statement. Notwithstanding the foregoing,, any
increase or decrease in volume of securities offered (if the total dollar value
of securities offered would not exceed that which was registered) any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) (ss.230.424(b) of this chapter) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) Include any material or changed information
the plan of distribution.
(2) For determining liability under the Securities Act,
treat each post-effective amendment as a new
registration statement of the securities offered, and
the offering of the securities as at that time to be
the initial bona fide offering thereof.
(3) File a post effective amendment to remove from
registration any of the securities that remain unsold
at the end of the offering.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel that matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(f) The undersigned small business issuer hereby undertakes that
it will:
(1) For purposes of determining any liability under the
Securities Act that the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be a part of this
registration statement as of the time the Commission declared it effective.
(2) For the purpose of determining any liability under
the Securities Act, that each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it meets all the requirements for filing on Form SB-2
and has duly caused this amendment to the registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Tel
Aviv, on August 27, 2003.
m-Wise, INC.
By: /s/ Shay Ben-Asulin
-------------------------------
Shay Ben-Asulin
Chairman
In accordance with the requirements of the Securities Act of 1933, this
amendment to Registration Statement has been signed by the following persons in
the capacities indicated on August 27, 2003.
By: /s/ Shay Ben-Asulin Chairman
-------------------------------------- (principal executive officer)
Shay Ben-Asulin
By: /s/ Gabriel Kabazo Chief Financial Officer (principal
-------------------------------------- financial and accounting officer)
Gabriel Kabazo
By: /s/ Mordechai Broudo Chief Executive Officer and
--------------------------------------
Director
Mordecai Broudo
EXHIBIT INDEX
3. Certificate of Incorporation and Bylaws
3.1. Amended and Restated Certificate of Incorporation(1)
3.2 Bylaws(1)
4. Instruments defining the rights of security holders
4.1 Purchase and registration rights agreement and schedule of
details.(1)
5.1 Opinion of Gersten, Savage, Kaplowitz, Wolf & Marcus.(2)
10. Material Contracts
10.1 Amended and Restated Employment Agreement with Mordechai
Broudo(1)
10.2 Amendment to Amended and Restated Employment Agreement with
Mordechai Broudo(1)
10.3 Amended and Restated Employment Agreement with Shay
Ben-Asulin(1)
10.4 Amendment to Amended and Restated Employment Agreement with
Shay Ben-Asulin(1)
10.5 Employment Agreement, Gabriel Kabazo(1)
10.6 Confidentiality rider to Gabriel Kabazo Employment
Agreement(1)
10.7 Employment Agreement Asaf Lewin(1)
10.8 2003 International Share Option Plan(1)
10.9 Form of Option Agreement, 2003 International Share Option
Plan(1)
10.10 2001 International Share Option Plan(1)
10.11 Form of Option Agreement, 2001 International Share Option
Plan(1)
10.12 2003 Israel Stock Option Plan(1)
10.13 Form of Option Agreement, 2003 Israel Stock Option Plan(1)
10.14 2001 Israel Share Option Plan(1)
10.15 Form of Option Agreement, 2001 Israel Share Option Plan(1)
10.16 Investors' Rights Agreement dated January 11, 2001
21. Subsidiaries of the small business issuer. We operate only one
subsidiary, which is incorporated in Israel. We operate under no other
tradenames.
23. Consents of Experts and Counsel
23.1 Consent of SF Partnership LLP(2)
23.2 Consent of Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP
included in Exhibit 5.1 hereto.(2)
All other Exhibits called for by Rule 601 of Regulation S-B are not
applicable to this filing.
(b) Financial Statement Schedules
All schedules are omitted because they are not applicable or because
the required information is included in the financial statements or notes
thereto.
(3) Previously filed. Filed herewith.